Planning for Growth: Sources of Finance for Business Expansion

This report discusses the various sources of finance that businesses can use to fund their expansion plans. It covers bank loans, crowdfunding, peer-to-peer lending, angel investors, venture finance, internal finance, external finance, short-term finance, medium-term finance, and long-term finance. The advantages and disadvantages of each source are also discussed.

Planning for growth

Table of Contents
INTRODUCTION...........................................................................................................................1
Main body .......................................................................................................................................1
CONCLUSION................................................................................................................................9
REFERENCE.................................................................................................................................10

INTRODUCTION
Planning is a need in every stage that uses run the business and increases profitability by
managing and organizing all activities. If a person is going to establish a business and wants to
expand it then it required money which fulfills by different sources (Mahmud, 2018). This report
is all about planning and sources of finance that are arranged by people for the purpose of
running a business. This report covers different sources of finance that are internal, external,
short term, long term, and etc. This also will help to increase the understanding of how a
business can grow and helps to increase profitability.
Main body
Sources of finance – This is a provision of finance that uses and make by organizations
to cover its short term working capital requirement, long term fixed assets, and investing.
The different sources of finance are as defined:
Bank loans: This is considered as the main source of finance that can be used by an
organization for buying inventory, equipment, and operating the capital, and running and
expanding business (Us, 2018). The manager of the organization is having options to operate and
manage the business activity by getting the loan amounts. Loans are given on the size and value
of the business that helps to make payment of amounts easily.
Advantages Disadvantages
 Bank loans keep control of the
company by creating value and making
payment on time easily.
 This helps to run and expand the
business further by arranging all funds.
 Bank loans are a secure amount that can
be received in a given period.
 The interest on bank loans is
deductible.
 Bank loans are tough to quality and
needed to pay on time otherwise it has
pay late charges.
 High-interest rates are charging by
banks on their giving loan amounts.
 This creates a feeling of stress in case
of non-payment of loan amounts.
 This can reduce organizational
productivity and profitability in case of
paying high amount.
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Crowd funding: This is the practice of funding that uses to raising the funds in small
amounts of money from the larger number of people that help to run the business and increases
performance. This is a good option for small businesses to arrange funds by arranging activities
properly.
Advantages Disadvantages
 This can be considered a fast way to
raise funds (Andrade and et. al., 2019).
 This provides an online platform where
people can get loan amounts. B
 This can help to maintain trust and
increases sales.
 Interest before launching projects.
 Patent and copy the right of their ideas.
 This provides only small amounts of
capital and funds.
Peer to Peer Lending: This means to obtain loans directly from other individual and
financial institution that increases the business activity.
Advantages Disadvantages
 There is no need of network operating
system.
 No needs of specialist workers
 Much easier to set up than client server
network
 Resources and files not organized and
managed centrally
 There are chances of viruses and slow
networks.
Angel investors: This can be defined as individuals who make available capital for
startups in exchange for convertible debt or entrepreneurship equity (Ono and et. al., 2018).
Advantages Disadvantages
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 Theses are much less risk and help to
get in less time.
 This is looking for personal opportunity
and investment.
 Theses are much less risk and help to
get in less time.
 Non-control over the operation.
 Receive a small portion of profits.
Venture finance: This is the form of private equity funds which is providing by venture
capital firms for start ups and higher growth of the business (Jachnik, Mirabile and Dobrinevski,
2019).
Advantages Disadvantages
 It can help to makes expertise business.
 Additional resources (Advantages and
disadvantages of venture capital, 2020).
 This provides valuable guidance and
expertise.
 No obligation for repayment.
 Loss of control
 Minority ownership status
 Early redemption by Venture capital.
 May require more return on real
investment.
* Internal finance
 Retained earning: This is the net income amount that is retained by the organization at a
fixed point of time and uses to run business further.
Advantages Disadvantages
 These funding businesses for growing
and performing further activities.
 This reduces the cost of issuing
external equity (Advantages and
disadvantages of retained earnings,
2020).
 No dilution of control and ownership
when organisation is relied on retained
 Taxes are levied on retained earnings
(Alfaro, Bloom and Lin, 2018).
 Opportunity cost of such earning is
relatively high.
 Accrual earnings and profits can be
limited.
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earning.
 Personal saving : This is an internal fund of a person who has collected for running their
business and future activities. This is not enough for running a a business a business but
can support to continue for fixed period.
Advantages Disadvantages
 This is easy to open, FSIC insurance,
access, and security that fill the
requirement of funds in the business.
 This helps to know exactly how much
money is available for running business
(Advantages and disadvantages of
personal savings, 2019).
 Having full ownership of business and
become responsible.
 This amount is not enough to operate
and lose control.
 There are changes to lose homes and
business in case of fail.
 Needed to develop their own contacts.
 Sales of assets: If an organization is having assets then it can arrange the funds by selling
it that can use to operate and grow the business (Bagella, ed., 2018).
Advantages Disadvantages
 Helps to receive quick money.
 Rapid disposal of assets.
 Seller can be exist to the business
effectively (Advantages and
disadvantages of selling assets, 2019).
 Depreciation and amortization of
assets.
 Assets are evaluated at low prices that
can reduce profitability.
 Loss of talented employees who are
working in organisation.
* External finance
Overdrafts: This means taking out more money than having into account.
Advantages Disadvantages
 The flexibility that helps to change the  Charges a high rate of interest on
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amount borrowed within limits and
interest is needed to pay only the
borrowed amount.
 This helps to handle mismatch of flow
of funds.
 Timely payments (Advantages and
disadvantages overdrafts, 2020).
 Gives benefits of interest cost.
borrowed amounts.
 Risk of seizing.
 Debtor's collection becomes Lethargic.
 Risk of reduction in limit.
Shares: This is the portion of high and larger amount which is divided between people
and dividend is provided on shares (Pardo-Guerra, 2019).
Advantages Disadvantages
 By selling shares in financial market
funds can be arranged by owners that
use to run business.
 Capital gain can be received by issuing
of shares.
 Limited liability.
 Liquidity that helps to receive funds
instantly.
 There are chances of loss of money
because prices can be reduced due to
fluctuation in the market.
 Highly risky (Advantages and
disadvantages overdrafts, 2020).
 Fluctuation in market price.
Debenture: This is defined as a debt instrument that is not secure by collateral and
having a term of 10 years. By using this organization can collect the money.
Advantages Disadvantages
 This provides a fixed rate of interest
and gets dividends on them.
 This encourages long term funding for
growing a business.
 Existing shareholder having control
(Advantages and disadvantages
debenture, 2019).
 Losses of rights to vote to have
debenture as it creates a debt of
repayment (Waleczek, Zehren, and
Flatten, 2018).
 No flexibility in their obligations for
making interest payments.
 By holding a debenture, shareholders
cannot give their opinions and attend
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the meeting.
* Short term finance
Short term loan: Such loans are given to a person for short period like up to 3 years.
This source is provided by banks up to a fixed amount by checking credit records that help to run
the business and increase profits.
Advantages Disadvantages
 This helps to collect the money for
short period for running activities.
 Lower interest rates as it is given for
less time period.
 Uses of alternative lenders (Advantages
and disadvantages short term loan,
2018).
 No loans are provided for a long period
that needed to pay after completion.
 Increases risk and cost.
 Small amount.
Hire purchase: This considered a scheme that can be used to getting amount in hands
quickly after spreading cost on the agreed period.
Advantages Disadvantages
 The interest rate on hire purchase is
fixed on the duration of the agreement
that helps to receive an amount.
 Immediate uses of items once
happening of agreement (Advantages
and disadvantages of hire purchase,
2019).
 This is the simple way of financing and
easy to obtain.
 These agreements are not free and
increase the cost for the lender
(Chamim, et. al., 2019).
 The duration of hire purchase schemes
can be quite long.
 Difficult to refinancing and loss of
assets and damage.
Trade credit: This is considered as a purchasing option that can be done on a credit
system and help to run all activities continuously.
Advantages Disadvantages
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 Increases sales
 Customer loyalty
 Competitive advantages
 Needs to monitor account receivable
 The possibility of bad debts.
 Lack of finance account receivable.
*Medium term finance:
Medium term loans: This means loans and amounts which is given by financial
institution and banks for the medium term. The period of medium loans is 3 to 10 years.
Advantages Disadvantages
 These loans usually have fixed interest
rates (Advantages and disadvantages of
medium term loans. 2020).
 This helps to improve the credit score.
 The loan is temporary and for 3 to 10
years that use to perform activities.
 Fees and penalties needs to pay in late
payment.
 This is required more paper work and
time (Gbadebo, 2020).
 Interest charges are needed to pay on
high rates that reduce profitability.
Leasing: This is another option to get the amount for a fixed period by giving the fixed
assets on a lease that helps to grow the business effectively (Leon, 2019). The organization can
arrange funds by giving their extra property on the lease that helps to receive a fixed amount of
rent on a fixed period.
Advantages Disadvantages
 This helps to balanced the cash flow.
 Gives tax benefits to organisation
(Advantages and disadvantages of
lease, 2020).
 No risk of obsolescence
 Risk involves in a lease as deprived
uses of assets.
 Higher cost
 Processing and documentation.
 Maintenance of assets.
* Long term Finance
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Long term loans: This means an organization and businesses have sources of collect the
long term finance from banks and financial institutions which are given for more than 10 years
and use in further activities concerning growth (Visco, 2018).
Advantages Disadvantages
 By getting long term finance business
concerns can businesses can grow and
create higher profits.
 This helps to raise money for long
period (Advantages and disadvantages
of long term loans, 2015).
 This provides an opportunity for
commercial banks and insurance
companies to invest their money.
 These agreements are not free and
increase the cost for the lender (Hoque
and Pour, 2018).
 High-interest rates are charged on long
term loans.
 Legal action can be taken in case of not
paying.
 Create a burden on loan takers.
Issue of shares: This is another mode of fund which can be used by the organization by
issuing share in public that helps to collect the money. Whenever organisation is needed money
then it can arrange by issuing the shares to public which help to collect funds.
Advantages Disadvantages
 Absence of fixed liability (Funds
raised by issues of shares, 2020).
 Preferred by adventurous investors.
 By issuing of share in the form of trade
and IPO it becomes easy for the
organization to arrange the funds and
continue the business activities.
 The return and activities depend on the
market that can create a challenge for
an organization to issue shares.
 Uncertainty of dividend.
 Danger of over-capitalization
Mortgage: This is an agreement between the lender and receiver that gives the rights to
the lender to use the property and get money into consideration (Hoque and Pour 2018).
Advantages Disadvantages
 Interest rates on mortgage are lower  In case of fail to pay the loan amount
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than other borrowing (About Mortgage.
2019).
 By giving property on mortgage funds
can be arranged which is called
borrowed amount also.
 By using this a business owner can
arrange the funds that support to
operate the business.
then it is received by selling the
mortgaged property.
 Watch out for fees which pays as
penalty.
 Loss of property that may be high
amount than loans.
* Government assistance
Small firms loan guarantee scheme: In this, loans are provided by the government to
small and medium size organization which helps to establish and run their business properly.
This can help to improve the activities by participating in CSR activities and improve
performance.
Advantages Disadvantages
 Small firms get the support of
government by getting loans on less
rate of interest and grows the business.
 For getting funds there is not need to
provide shares, debenture and any other
security (About government assistance,
2019).
 Helps to increase the insights of people
and confidence of business by
introducing public company.
 A loan is given to small organizational
only and loss of repayment.
 There is need to align the goals with
government schemes which may be
difficult for organisation.
 Having many rival businesses and
creates challenges for business.
Regional development assistance: This means assistance is provided to regions that are
less economically developed and helps to run business (Aggarwal and Acharya, 2019).
Advantages Disadvantages
 This helps to develop the business and  Less control over activities.
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increase profitability (About regional
development assistance. 2019).
 Efficient uses of funds
 Completion of task by attaining the
proper assistance.
 Increases debts in case of not
repayment.
 Funds are provided to regional sector
only.
CONCLUSION
From the above discussion it can be concluded that different sources of finance are
internal, external, short term, medium term and long term that are uses to collect the funds and
running a business properly.
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REFERENCE
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Hoque, H. and Pour, E. K., 2018. Bank‐level and country‐level determinants of bank capital
structure and funding sources. International Journal of Finance & Economics. 23(4).
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Visco, I., 2018. Banks and finance after the crisis: Lessons and challenges. PSL Quarterly
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Aggarwal, A. and Acharya, S. R., 2019. CHOOSING EQUITY AS A SOURCE OF FINANCE:
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Chamim, A. N. N., et. al., 2019. Analysis of Potential Alternative Energy Sources for Electricity
Conservation in Yogyakarta State Finance Building. Journal of Electrical Technology
UMY. 3(3). pp.98-105.
Waleczek, P., Zehren, T. and Flatten, T. C., 2018. Start‐up financing: How founders finance
their ventures' early stage. Managerial and Decision Economics. 39(5). pp.535-549.
Pardo-Guerra, J. P., 2019. Automating finance: infrastructures, engineers, and the making of
electronic markets. Cambridge University Press.
Bagella, M. ed., 2018. Finance, investment and innovation: theory and empirical evidence (Vol.
4). Routledge.
Alfaro, I., Bloom, N. and Lin, X., 2018. The finance uncertainty multiplier (No. w24571).
National Bureau of Economic Research.
Jachnik, R., Mirabile, M. and Dobrinevski, A., 2019. Tracking finance flows towards assessing
their consistency with climate objectives.
Ono, A., and et. al., 2018. Long-term interest rates and bank loan supply: Evidence from firm-
bank loan-level data. Tokyo Center for Economic Research (TCER) Paper, (e119).
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Andrade, P., and et. al., 2019. Can the provision of long-term liquidity help to avoid a credit
crunch? Evidence from the Eurosystem’s LTRO. Journal of the European Economic
Association. 17(4). pp.1070-1106.
Us, V., 2018. The determinants of nonperforming loans before and after the crisis: Challenges
and policy implications for Turkish banks. Emerging Markets Finance and Trade.
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Mahmud, U. E., 2018. External Debt Burden and Management in the Third World: A Cross-
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