“You must gain control over your money or the lack of it will forever control you”
Dave Ramsey
Find out more on Financial Freedom in the IB Business Management Unit 3.2 😉
The Significance of Financial Resources
Finance access is mandatory for a business to survive in a competitive market. It helps the business to have a decision-making process in investment, perform day-to-day operations, or even enables businesses to scale up their businesses, and for research and development which can result in creating new innovative products, services, and technologies. Therefore, financial resources prepare businesses in terms of growth and sustainability. Inadequate financial resources can leave businesses struggling to grab opportunities, grow their activities, or navigate unexpected challenges.
This blog contains comprehensive and detailed information that helps you understand the types of financial resources, and how they benefit or damage the business. I guarantee that the theories will be useful in the future for you to grab the right financial options for yourself, and your business.
Duration of Finance
Short-term sources
Financial resources that last less or within 12 months. The purpose of short-term financial sources is to solve cash flow problems or to pay revenue expenditure for smooth business operations. It helps address sudden expenses and tackle unexpected financial challenges.
What are the benefits?
- Quick funds – businesses can address sudden financial challenges within a week after approval.
- Resources are available even with bad credit scores – unlike long-term loans, short-term resources are less strict on your credit report which makes it easier to access these resources.
- Easy application – some lenders may require a more complicated application process, majority of them provide a much simpler process which leads to quicker funding.
What are the limitations?
- High costs – high-interest rates, fees and penalties for failure to repay.
- Limited amount of funding – it often offers a small amount of funding along with high extra costs such as interest which puts business owner who requires more financial needs in a vulnerable position.
Medium-term sources
Financial resources that last longer than one year, but less than five years. Medium-term resources are used in finance capital expenditure or the purchase of fixed assets such as buildings, and machinery.
What are the benefits?
- Cost-effectiveness – medium-term financial resources have lower rates of interest rates, and are cheaper than long-term loans with fixed interest rates over the years.
- Risk management – unlike short-term finances, it reduces the financial burden of the business of repaying a large amount of interest in a short period and dealing with the unpredictability of interest fluctuation over a prolonged period.
What are the limitations?
- Repayment pressure – even though the deadlines for repayment are longer, it still strains a business’s cash flow.
- Opportunity cost – businesses may miss out on more favourable financing opportunities that become available in the future that provide lower interest rates or more flexible financing options.
Long-term sources
Financial resources that last longer than 5 years. People use long-term sources to pay off their education, buy a house, or start a business.
What are the benefits?
- Affording larger expenses – allows businesses to afford more long-term projects that will offer future growth and huge marketing campaigns, R&D and more.
- Flexible repayment terms – as it takes longer to pay a certain amount, businesses will have smaller monthly payments and it is preferred by financial institutions as they gain a stable income stream.
What are the limitations?
- Higher eligibility criteria – long-term loans involve meticulous checking of financial history starting from the profitability of the business in terms of repaying loans from financial institutions like banks which makes it hard for new businesses to borrow long-term finances.
- Longer duration of repayment – If the firm does not have a repayment strategy, this may negatively affect the business’s credit score and cash flow.
Types of sources
There are 2 types of sources of finance – internal sources, and external sources.
Internal sources of finance
Internal sources of finance are financial resources that are raised within the business.
| Source | Duration | Advantage | Disadvantage | Suitable for? |
| No interest or additional cost is involved which does not put the business under a financial burden. | Varies; can be used all duration of finances. | Owners might be forced to invest their own funds during recessions and falling sales just to keep their business going. | No interest or additional cost is involved which does not put the business into financial burden. | Small businesses that do not require large amounts of funding. |
| Retained profit Leftover money after paying off all the expenses, dividends, and taxes for the usage of working capital. Accumulating profits for years for expansion. | Varies; can be used all duration of finances. | Can be used to fund future growth, debt repayment, etc. External finances such as bank loans are not required. | May take many years before the funds are in place. | All businesses. |
| Sales of assets Selling old assets like machinery, buildings, etc. | Depends on the size of the asset. | It can raise large amounts of money that can be reinvested into new projects. | Opportunity cost – loss of ability to use the assets for production. | All businesses. |
External sources of finance
When money, funds, and capital are not originated from the organisation.
| Source | Duration | Advantage | Disadvantage | Suitable for? |
| Business angels Investors risking their own financial investments on very high global potential business. | Long term | No repayments or interest, Provide essential funds for business startups to avoid taking out loans. | Aren’t fully in control. Investors have high expectations for a substantial return on their investments. | Small businesses are full of potential. |
| Loan capital Capital that is raised through loans. Requires when businesses require money in bulk. | Long term | Businesses can use it immediately for emergencies. Business capital loans, especially in financing companies, are processed easily and quickly. | Very high-interest rates and since it also fluctuates, a business may have highs and lows in the interest rates which negatively influence the cashflow forecast of the business. | Businesses that need capital to finance their operations, growth, or purchase of assets. |
| Share capital Capital that the business raised by selling shares depends on the private or public limited company. | Long term | Provides more financial security as a limited company has less amount of liability which leads to a lower rate of bankruptcy. | Reduced ownership and control. | A small business that has full potential and requires patient capital. |
| Debentures Companies raise money from the public or investors. | Certain limit is set in overdrafts where businesses may receive limited funding to deal with financial challenges. | During inflation, issuing debentures can be advantageous as they offer a fixed interest rate. ‘ The company can quickly redeem funds when they have surplus funds. | The payment of interest and principal becomes a financial burden for the company in case of no profits. The debenture holders have no voting rights therefore, they do not have control over management decisions. | A bank, factoring company or invoice discounter. |
| Overdraft Withdrawing money more than money in a bank account. | Short-term | The company can get the money instantly to quickly deal with cash shortage. | The amount of funds that businesses can receive is limited where business may not be able to fully address sudden financial challenges. | People who want to avoid fees for bounced payments, or who need extra money for emergencies. |
| Trade credit Customers purchase goods and pay the supplier later than the payment day. | Short-term | Trade credit can be useful for new businesses unable to raise funding or secure business loans yet need stock quickly. Demonstrating business can make regular payments against credit is a good way of establishing and maintaining it as a valuable customer. | Fall behind on trade credit payments and the business could face legal action, which could culminate in a court judgment, which will impact credit rating. | Customers who have a reasonable amount of financial standing and goodwill. |
| Crowdfunding Business is funded by a large number of people contributing small amount of money. | Short-term | Often get feedback and expert guidance on how to improve it. It can be a fast way to raise finance with no upfront fees | It will not necessarily be an easier process to go through compared to the more traditional ways of raising finance as not all projects that apply to crowdfunding platforms get onto the firm. | Entrepreneurs, nonprofits, artists, and individuals. |
| Leasing Rent that is charged for the long-term. | Long-term | Helps to cut down the cost of the firm. | Sometimes, the purchase of buildings or machinery may be cheaper than leasing out fixed assets which requires businesses to make good financial decisions. | People who are financially stable and have good credit. |
| Microfinance Businesses that provide banking services towards low-income or unemployed individuals and groups. | Short-term | It helps households to work efficiently, and alleviate poverty. Allows businessmen to run their companies and upscale their businesses at the same time. | Many low-income people might take out loans they can’t afford since they don’t completely comprehend the terms and circumstances of the loan. In such a situation when people are unable to pay back the loan amount, microfinance companies use very harsh and sometimes unlawful methods to get the loan amount back and people get harassed by them. | Unemployed or low-income individuals |
| Venture capital A form of private equity and a type of financing for startup companies and small businesses with long-term growth potential. | Long term | Offers an opportunity for expansion, helpful in building networks. Businesses can raise a large amount of capital. | Loss of ownership and control. | Startup companies and small businesses with long-term growth potential. |
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Resources used
“App | Kognity.” App.kognity.com, app.kognity.com/study/app/2024-business-management-hl/sid-351-cid-160338/book/internal-sources-of-finance-id-39255/. Accessed 20 Mar. 2024.
“Difference between Short-Term and Long-Term Financing – Bajaj Finance Limited.” Www.bajajfinserv.in, www.bajajfinserv.in/difference-between-short-and-long-term-financing#:~:text=What%20is%20short%2Dterm%20financing. Accessed 20 Mar. 2024.
“The Pros and Cons of a Short-Term Loan.” Www.innovationcu.ca, www.innovationcu.ca/personal/advice-tools/blog/2023/the-pros-and-cons-of-a-short-term-loan.html.
AF Bureau. “The Pros and Cons of Long-Term Financing.” ALCOR FUND, 1 Dec. 2022, alcorfund.com/insight/the-pros-and-cons-of-long-term-financing/.
James, Harper. “Business Angels: Advantages and Disadvantages | Financing for Start-Ups.” Harper James, 2022, harperjames.co.uk/blog/business-angels-advantages-and-disadvantages/.
Jalan, Trupti. “Debentures.” Scripbox, 18 Aug. 2023, scripbox.com/pf/debentures/.
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