There are many sources of finance for a business from internal and

external sources of finance to financial institutions. These sources of funds

can aid a business achieve its financial goals profitability, growth,
liquidity, efficiency and solvency. To respond to these influences,
businesses can implement a variety of strategies through improved
management of working capital, profitability and cash flow statements.
Internal sources of finance are the funds that come from within the
business; including retained profits and owners equity. Retained profits
are the retained earnings of the business that are kept within the business
as a source of easily accessible finance for any future activities. This is the
most common source of internal finance as it allows for more capital
available for growth and higher returns on investment and shareholder
equity. Growth is a crucial objective of a businesss financial management
as improvements and expansions are necessary for a business to maintain
their market share and competitive edge that will lead to greater returns,
however, it is an expensive process that retained profits can help achieve
as it is easier to access. For example, Apple retained over USD100 billion
of their profits in 2013 for future investments. Nevertheless, there are also
disadvantages with using retained profits as a source of funding such as
the reduction of current dividend. As part of the profit is being retained for
future use, there is less to be divided amongst the shareholders which can
decrease the number of investors.
Owners equity is another source of internal finance that is the funds
contributed by owners or partners to establish and build the business.
Owners equity can help the business achieve its financial objectives,
especially profitability and solvency. The owners equity does not need to
be repaid which is an advantage as there will also be no interest to be
paid, a sum of money that can be used in the expansion of the business.
Also, this will help the business maintain a lower debt to equity ratio which
improves its solvency. However, the disadvantage in using owners equity
is the increased risk for the owner if the business fails. Internal sources of
finance are always essential in the establishment of a business as it is
often the cheapest and most accessible option.
External sources of financing are a major source for funds for businesses.
It is the funds provided by sources outside the business such as banks,
financial institutions and the government. There are three types of
external funds short term debt, long term debt and equity.
Overdrafts, commercial bills and factoring and are all forms of external
sources of funds that can aid a business in achieving its financial goals.
Overdraft is when the bank allows a business to overdraw on its cheque
account. This is a very common source of funds as it a lot more flexible
than a general bank loan and it helps the business with any short term
debts and overall liquidity at a lower interest rate. Commercial bills are
another form of short term loan that are issued by financial institutions for

larger amounts that are usually repaid within 6 months. This form of debt
also aids the business in its liquidity as it is generally flexible with both its
interest rate and repayment period because it is often secured against the
businesss assets, which may be a risk for the business if anything is to go
awry. Another short term debt source of financing is factoring; the selling
of accounts receivable to obtain instant funds at a usually lower price.
Factoring is a great method for a business that is in need to improve their
cash flow as it gives them instant funds and will immediately lower their
gearing ratio. Factoring will save the business both time and the costs of
obtaining the accounts receivable and they will generally receive around
90% the funds almost immediately. Short term debts are commonly used
by businesses as they are more flexible and hold less risk for the owners.
Long term debt is another form of external sources of finance, including
mortgages, debentures, unsecured notes and leasing. Mortgage is a loan
secured by the property of the business and is used to finance property
purchases such as a new premise. Mortgages allow businesses to
purchase a property without complete funds, hence leaving more finances
available for other business ventures. However, mortgages are always
repaid with interest which can fluctuate depending on the contract with
the bank. Debentures are another form of long term debt where a
company issues the lender with a written promise of repaying the sum of
money within a certain timeframe. Debentures are generally a low risk
source of finance as the interest rates are fixed and the business will have
to issue a prospectus for investors to approve the debenture. For example,
many finance companies raise funds through issuing debentures to the
public. Unsecured notes is a form of loan from investors for a period of
time, however, they are not secured to the businesss assets, hence the
interest rates are much higher as it is more risky for the lender. Leasing is
a form of long term debt that involves the payment of money for the use
of equipment owned by the lessor. There are two types of leases,
operating and financial where in an operating lease, the assets leased are
not purchased at the end of the term whilst with the financial lease, the
lessee will eventually own the asset. Leasing as a source of finance has
many benefits as it can lower the cost of establishment as well as
providing long term financing without reducing control of ownership.
However a disadvantage of leasing is that interest charges may be higher
than other form of borrowing. Long term debt is commonly used by
businesses as demonstrated in the Apple report where Apple had over
USD16.9 billion in long term debts in 2013, increasing its gearing to 67%.
However, the value of shareholders equity remained significantly higher
than Apples debt; hence the level of gearing was still relatively low threat
to their solvency.
Equity as external source of finance involves raising funds through new
owners. This is generally done through issuing shares to the public through
the ASX but it can also be private. The two types of external equity are
ordinary shares and private equity. Ordinary shares include new issues,

rights issues, placements and share purchase plans and are the most
common shares in Australia as it means that individuals can purchase
shares to become part owners of a public company. When shareholders
purchase the share, they are providing equity for the business and will in
turn get dividend. Public companies can raise funds on a large scale
through the issuing of shares as it is open to everyone. Private equity on
the other hand is money invested into a private company, not listed on the
ASX but the aim is still to raise finance. Apple is a public company with
over USD$104 billion in shareholder equity in 2013 which can be used to
fund the research and future development of the company.
In conclusion, there are many sources of finance to help a business
achieve its financial goals and even though each has both advantages and
disadvantages, a business will need to use at least one of them to achieve
their financial goals. Whether it is through owners equity or mortgages,
these sources of funds will be able to aid the business in achieving its
financial goals of profitability, liquidity, efficiency, growth and solvency.

Globalisation has drastically increased the number of companies now

sourcing funds globally but there are several issues involved with this
economic expansion especially the concerns of exchange rate, interest
rates, and methods of international payment as well as hedging and
derivatives.
Exchange rates fluctuate on a daily basis and it is a key issue for
businesses dealing with funds globally. The rise in AUD can help
businesses with cheaper imports but the fall in AUD can also lead to a rise
in costs of imports. Currency fluctuations can significantly impact the
profitability of global businesses especially when revenues and expenses
are transferred between nations as exchange rates can either increase or
decrease their value, affecting its ability to meet financial objectives.
However interest rates can often be lower in different countries so loans
may require less in interest but with the fluctuation of currency, it can be a
risky decision for businesses. Methods of international payment are a
crucial for the business to maintain a healthy accounts turnover ratio.
There are several ways of payment including payment in advance, letter of
credit, clean payment and bill of exchange. Most businesses choose
payment in advance and letter of credit as they are the lowest risk.
Business also use hedging and derivatives to try to reduce the risk of the
change in currency through investing in another currency that guarantees
to outweigh the other and through contracts between global businesses.