5.1.1 Types of finance
Small companies obtain finance from a wide variety of different sources.
Task 30: Sources of finance
Match each source with its description and the percentage of businesses using each source. The percentages relate to respondents.
Were you surprised at how many businesses access money from each different source?
Using the following two lists, match each numbered item with the correct letter.
Family and friends
Leasing or hire-purchase (HP)
a.Funds found without a formal agreement 12%
b.A long-term loan similar to a domestic mortgage 4.9%
c.Funds provided by investors, frequently seen as high risk and therefore high return expected 12.4%
d.Like a domestic HP agreement 3.1%
e.Money available for specific purposes, often with key requirements 15.7%
f.Gifts or loans from family members or friends 2.5%
g.Agreed sum over an agreed period at an agreed rate of interest 50.8%
h.Delaying payment of invoices to increase availability of cash 1.8%
i.Part of the small firms scheme 3.4%
j.Using the value of assets to release funds 1.9%
k.Ability to exceed balance of account usually to a defined limit at a prescribed interest rate 21.5%
- 1 = j
- 2 = f
- 3 = b
- 4 = c
- 5 = h
- 6 = a
- 7 = i
- 8 = e
- 9 = d
- 10 = g
- 11 = k
The per cent of respondents seeking finance through these alternatives varied considerably as you can see from the table. Small and young businesses are more likely to be thinking short term, but this research suggests that thinking with the longer term in view is the differentiator that will lead to business survival. As one expert is quoted: ‘It’s like learning to ski, if you keep your eyes on the mountain, you get down there safely. But if you look at the bumps along the way, you’ve had it.’
Young firms are more likely to look at a range of options when raising funds. Bank loans and overdrafts are still very common, but grants and venture capitalists also feature. A significant number of business owners have put money in themselves.
The survey found that 31% of entrepreneurs consult their bank when they start but, after two years or longer of being in business, this falls off to 27%. Perhaps this is illustrative of a broader problem: small businesses may not be using the most obvious resources to help them grow as effectively as they could.