Sources of Finance — Each Source
Owner's Capital
| Attribute | Detail |
|---|
| Business types | Sole trader only |
| Duration | Long-term (permanent) |
| Repayment | None unless business is sold or closed |
| Cost | Opportunity cost of the funds (profit forgone from alternative use) |
| Purpose | Start business or provide additional capital |
| Security required | No |
| SoFP position | Capital section |
| Gearing impact | Not applicable |
| Ownership/control | No change (100% control retained) |
| Internal/external | Internal |
Partners' Capital
| Attribute | Detail |
|---|
| Business types | Partnerships |
| Duration | Long-term (permanent while partner remains) |
| Repayment | None unless a partner leaves or business dissolves |
| Cost | Share of profit (via profit-sharing ratio, taken as drawings) |
| Purpose | Start or expand the partnership |
| Security required | No |
| SoFP position | Capital accounts section |
| Gearing impact | Reduces gearing |
| Ownership/control | Diluted with more partners |
Bank Overdraft
| Attribute | Detail |
|---|
| Business types | Sole traders, partnerships, Ltd, plc |
| Duration | Short-term (less than one year) |
| Repayment | Repayable on demand |
| Cost | Interest on the outstanding balance (daily rate); arrangement fee possible |
| Purpose | Working capital needs — covering short-term cash flow gaps |
| Security required | Not usually |
| SoFP position | Current liabilities |
| Gearing impact | Low; does not affect gearing ratio significantly |
| Ownership/control |
Key point: An overdraft is not appropriate for financing non-current assets — it is repayable on demand and is mismatching a short-term source with a long-term need.
Bank Loan
| Attribute | Detail |
|---|
| Business types | Sole traders, partnerships, Ltd, plc |
| Duration | Short, medium or long term |
| Repayment | Fixed monthly instalments over the loan period |
| Cost | Interest at a fixed or variable rate; arrangement fee |
| Purpose | Purchase of non-current assets; working capital |
| Security required | Yes — collateral (non-current assets) required to protect against default |
| SoFP position | Current liabilities (< 1 year portion) and non-current liabilities (> 1 year portion) |
| Gearing impact | Increases gearing |
| Ownership/control |
Mortgage
| Attribute | Detail |
|---|
| Business types | Sole traders, partnerships, Ltd, plc |
| Duration | Long-term (typically 25 years) |
| Repayment | Monthly instalments (capital + interest) over the mortgage period |
| Cost | Interest at fixed, variable or tracker rates |
| Purpose | Purchase of land and buildings specifically |
| Security required | Yes — the land and buildings are repossessed if mortgage is not paid |
| SoFP position | Non-current liabilities |
| Gearing impact | Increases gearing |
| Ownership/control |
Ordinary Shares
| Attribute | Detail |
|---|
| Business types | Ltd and plc only |
| Duration | Long-term (permanent) |
| Repayment | None (shareholders receive investment back only if company ceases trading, subject to limited liability) |
| Cost | Variable dividends depending on profit — directors decide; dividends reduce retained profit |
| Purpose | Start business or fund expansion |
| Security required | None |
| SoFP position | Equity section (share capital and reserves) |
| Gearing impact | Reduces gearing |
| Ownership/control |
Note: Dividends are not an expense in the income statement — they do not reduce profit for the year. They reduce retained profit in the equity section.
Debentures
| Attribute | Detail |
|---|
| Business types | Ltd and plc (most common in plcs) |
| Duration | Long-term (at least 20 years typically) |
| Repayment | Lump sum in full at the maturity date |
| Cost | Fixed interest rate — must be paid regardless of profit or loss |
| Purpose | Expansion or growth |
| Security required | Yes — secured against non-current assets |
| SoFP position | Non-current liabilities |
| Gearing impact | Increases gearing significantly |
|
Key point: Debenture interest is an expense in the income statement — it reduces profit every year, regardless of financial performance. If interest cannot be paid, it may lead to liquidation.