Choosing The Right Source of Finance For Your Business

Choosing the Right Source of Finance: The What, When and Why

Right, let's talk about something that could actually be the difference between business brilliance and bankruptcy: choosing the right source of finance. Think of it like this - you wouldn't buy a house using just your overdraft, would you? (Well, you couldn't, but you get the point.) Yet businesses mess decisions on financial resources up all the time.

The BrewDog Story: When Crowdfunding Actually Works

Remember BrewDog? That Scottish craft beer company with the punk attitude and bars that look like industrial warehouses? Well, back in 2010, they did something pretty radical. Instead of going cap-in-hand to boring banks, they launched their "Equity for Punks" crowdfunding campaign.

If you'd bought one £230 share back then, by 2017 it would've been worth £6,590. That's a 2,765% increase in seven years. The company's now valued at around £2 billion. Not bad for a bunch of guys who started brewing beer in their garage, right?

Crowdfunding worked for BrewDog because it was appropriate for their situation. They were an innovative startup with a strong brand story that resonated with customers. People weren't just buying shares; they were buying into the BrewDog lifestyle.

And they're not alone. Revolut, that fintech app you probably use to split bills with your mates, gave early crowdfunding investors a 400x return when it hit a $45 billion valuation in 2024. Monzo turned a 51p share into roughly £65 - a 130x growth in eight years.

Sounds brilliant, doesn't it? Everyone should crowdfund then!

Well... not quite.

The Harsh Reality: Most Crowdfunding Fails

Here's what they don't tell you in YouTube or put in the promotional material: 60% of UK startups fail within the first three years (Yes, that is 6 out of 10). And in 2024, crowdfunding deals in the UK collapsed to just 297 - the lowest figure since 2017, down from 569 deals in 2021.

Why? Because crowdfunding is appropriate for very specific situations:

• Innovative start-up businesses with strong customer appeal

• Projects that can tell a compelling story

• B2C (business-to-consumer) companies where people can actually understand and relate to the product

But it's not appropriate for:

• Raising large amounts of capital (the risks are too high)

• Businesses without a clear, exciting value proposition

• Most established businesses that need serious money

This is what IB Business Management examiners want you to understand: the appropriateness of different sources of finance depends on the situation faced by a business.

When Things Go Horribly Wrong: The Overtrading Epidemic

Let's talk about UK construction companies right now. It was a major talking point no so long ago.

In 2024, around 5,000 construction and real estate firms were expected to go bust. The main culprit? Overtrading - when companies expand too quickly without sufficient sources of finance in place to sustain operations.

You're a construction firm, you win three massive contracts (brilliant!), you hire loads of workers, buy materials, rent equipment... and then you have to wait 60-90 days to actually get paid. Meanwhile, your staff want their wages now, your suppliers want paying now, and suddenly you're juggling credit cards, overdrafts, and increasingly angry phone calls.

Many of these firms are struggling with loss-making contracts and liquidity issues. They're attempting to overtrade, which creates a domino effect across the whole sector. They took on work they couldn't afford to finance properly, and now they're drowning.

This is a textbook example of inappropriate financing choices. These companies needed:

• Long-term finance (like bank loans or share capital) for their expansion plans

• Proper working capital management to cover the gap between paying suppliers and getting paid by clients

What they actually used:

• Short-term finance (overdrafts, trade credit) stretched beyond breaking point

• Hope and prayer (not an officially recognised source of finance surprisingly, but nevertheless a very common one)

Matching Finance to Purpose: The Golden Rule

Here's the fundamental principle that'll save you marks in exams and save businesses from bankruptcy:

Short-term finance (up to one year) should fund short-term needs. Long-term finance (more than one year) should fund long-term growth.

Think of it like fuel for different types of journeys:

• Short-term finance (overdrafts, trade credit, crowdfunding) = petrol for daily driving

• Long-term finance (share capital, bank loans, leasing) = the actual car purchase

You wouldn't try to buy a car by filling up at the petrol station every day and hoping it magically appears, would you? Yet businesses essentially do this when they use overdrafts to fund expansion.

The Real-World Financing Toolkit

Let's break down what actually works in different situations, using IB Business Management real-life examples from 2024-2025:

Internal Sources: When You Fund Yourself

Personal funds - Great if you're just starting out and need £5,000 for a website and some stock. Not so great if you're trying to build the next SpaceX. JK Rowling famously wrote Harry Potter as a single mum on benefits; she didn't need venture capital to write a book. But she did need a publisher's investment to actually print and distribute millions of copies.

Retained profit - This is the "save up your pocket money" solution. Companies like Apple sit on enormous cash reserves (over $200 billion at times). They could use retained profits for everything. But shareholders might start demanding dividend payouts instead. It's also typically not enough for serious growth - imagine saving up to buy a factory one tenner at a time.

Sale of assets - Perfect if you're upgrading outdated equipment or facing a major liquidity crisis. Not ideal if you need those assets to, you know, actually run your business. It's like selling your laptop to pay rent - solves today's problem, creates tomorrow's disaster.

External Sources: When You Need Other People's Money

Share capital - This is how major companies raise serious money. In 2025, we're seeing companies like Shein potentially listing in London to raise capital. The advantage? No debt, no interest payments, and a large amount of finance can be raised.

The disadvantages? It's complex, time-consuming, and costly to convert to a limited liability company. Plus, there's dilution of ownership - every share you sell means you own less of your company. Imagine BrewDog's founders watching their ownership percentage drop with each crowdfunding round. Worth it for the £2 billion valuation? Probably. But it's still a trade-off.

Also, dilution exposes a business to takeover bids. In 2024, London experienced its largest exodus of companies since the financial crisis, with many being snapped up in takeovers worth approximately £52 billion.

Loan capital - The traditional "go to the bank with your business plan" approach. Banks currently have tightened their lending standards significantly, which is why the private credit market is expected to reach $1.8 trillion by 2026 - basically, if banks won't lend, other organisations will (at a higher cost).

Loan capital:

• Helps fund the purchase of non-current assets (buildings, machinery, vehicles)

• Is accessible to most businesses (if you can convince the lender you won't do a runner)

• Increases the debts of the business and incurs interest charges

It's not appropriate for businesses with liquidity issues or those with a very high gearing ratio (already heavily in debt). Lending more money to someone drowning in debt is like throwing someone an anchor when they need a life jacket.

Overdraft - Your financial safety net for the 21st century. UK businesses are increasingly relying on overdrafts to deal with short-term liquidity problems. They're quick, common, and flexible.

However, in this case, very high interest rates are charged on the debts. We're talking 30%+ in some cases. That's loan-shark territory (well, legal loan sharks). Overdrafts are for smoothing cash flow hiccups, not funding your three-year expansion plan.

Trade credit - This is the "buy now, pay later" of the business world, but usually interest-free during the credit period (typically 30-60 days). Brilliant for managing cash flow. Dangerous if you're encouraging overtrading, which causes high inventory costs.

The risk? Bad debts - funds that cannot be recovered from your debtors. When customers don't pay, those "sales" on paper become real losses. UK businesses are currently struggling with late payments, with SMEs particularly affected. Some customers take 120+ days to pay instead of the agreed 30, creating massive cash flow problems.

Crowdfunding - We've covered the success stories (BrewDog, Revolut, Monzo). But let's look at the 2025 reality:

• UK equity crowdfunding raised £324 million in 2024 (down from £773 million in 2021)

• Only 297 crowdfunding deals completed (lowest since 2017)

• Median funding round: £500k (compared to £1.72m for venture capital deals)

Crowdfunding is suitable for:

• Innovative start-ups with compelling stories

• Funding new business projects or ideas

• B2C companies where customers can become investors

It's not suitable for:

• Raising large amounts of capital

• Businesses without strong brand appeal

• Companies that can't afford to spend 6-12 months on a campaign

Business Angels - These are wealthy individuals who invest their own money (plus expertise and connections) in early-stage businesses. In 2025, UK angel networks invested £212 million across 99 deals in the first half alone.

IB Business Management real-life examples:

• JECO (gaming development tools): £960,000 from Games Angels

• Portal Biotech: £3 million from the Regional Angels Programme

• Numerous female-led startups receiving investment from HERmesa angel group

Business angels are useful for smaller firms that cannot raise finance via the stock market or commercial bank loans. They bring expertise and advice, not just money.

But they're not appropriate if you're unwilling to allow others to have a significant stake in your business. Angel investors typically take 10-25% ownership, which means dilution of control and ownership. Plus, they're not an easily accessible source of funds for most businesses - you need to network, pitch, and convince them your business is worth backing.

Leasing - Instead of buying that £50,000 delivery van, you lease it. This gives access to non-current assets without the need for capital expenditure. The lessor (the company you're leasing from) is responsible for maintenance costs, and upgrades are easily arranged.

Perfect for businesses that need equipment but want to preserve cash. Bear in mind that In the long run, leasing is more expensive than buying. Plus, the lessor can impose quantitative limits on usage (like mileage caps on vehicles). It's the equivalent of renting instead of buying a house - flexible, but you never actually own the asset.

Microfinance - This gives those typically excluded from banking services (think developing countries, low-income communities) access to financial services. It can genuinely help lift people out of poverty.

The reality? Usually involves high interest rates, and the funds are only minimal, so may not be sufficient for serious business growth. It's appropriate for very small-scale entrepreneurs who have zero access to traditional finance. Not appropriate for anyone who can access normal banking.

What IB Business Management Examiners Actually Want

When you get an exam question asking about "appropriate sources of finance," they want you to analyse the specific situation:

1. What's the purpose? Daily operations? Buying a factory? Covering temporary cash flow gaps? Funding expansion?

2. What's the company structure? Sole trader can't issue shares. Limited company can't rely on personal funds.

3. What's the financial position? Already heavily in debt? Don't take more loans. Liquidity crisis? Selling assets might be necessary even if not ideal.

4. What's the time frame? Need money for 30 days or 30 years? This determines short-term vs long-term sources.

5. Who are the owners and what do they want? Willing to share ownership? Share capital or angels might work. Want total control? Stick with loans and retained profits.

The Current State of UK Business Finance: 2025 Reality Check

Let's be brutally honest about what's happening right now:

• 29,000+ UK businesses were expected to fail in 2024 - that's 5% more than the previous year

• Insolvency rates are 43% above 2019 levels (the highest in Europe alongside Ireland)

• Construction, retail, and hospitality hardest hit - these sectors account for 47% of total insolvencies

• 12% of UK firms classified as "fragile" with liquidity concerns

The main culprits?

• Post-Brexit trade complexities

• Inflation and rising operating costs

• High interest rates making loans expensive

• Delayed payments creating cash flow nightmares

This isn't just abstract textbook theory - real businesses, with real employees, are collapsing because they made poor financing decisions. Many used short-term sources to fund long-term needs, overtrade without proper capital backing, or took on debt they couldn't service.

Try Not To Be That Business

Here's your cheat sheet for choosing appropriate finance:

Match the time frame:

• Short-term needs = short-term finance (overdrafts, trade credit)

• Long-term needs = long-term finance (share capital, loans, leasing)

Consider your legal structure:

• Sole trader/partnership = personal funds, retained profit, loans

• Limited company = add share capital as an option

Assess your risk tolerance:

• Don't want debt? = Share capital, retained profits (but accept dilution)

• Don't want to share ownership? = Loans, overdrafts (but accept interest payments)

Evaluate your situation:

• Upgrading assets? = Sale of old assets, leasing

• Major liquidity crisis? = Asset sales, emergency measures

• Innovative startup? = Crowdfunding, business angels

• Established business expansion? = Share capital, long-term loans

• Already heavily indebted? = NOT more loans

Be realistic about access:

• Not a limited company? Can't issue shares

• No valuable assets? Can't get secured loans

• Boring business model? Crowdfunding won't work

• Can't network with wealthy investors? Business angels unlikely

It's About Matching, Not Praying And Hoping For the Best

The appropriateness of finance sources isn't just an exam topic - it's the reason companies like BrewDog become billion-pound success stories while thousands of others collapse into bankruptcy.

The businesses failing right now? Many of them didn't choose bad sources of finance. They chose inappropriate sources for their specific situations. They used overdrafts for expansion, took loans they couldn't repay, or expanded without sufficient financial backing.

Your job as an IB Business Management student isn't to memorise that "share capital is good" or "overdrafts are bad." It's to analyse specific business situations and recommend the most appropriate combination of finance sources.

Because in the real world, getting this wrong doesn't mean losing exam marks. It means losing your business, your employees' jobs, and potentially your house if you gave personal guarantees on those loans.

So next time you see a question asking about sources of finance, don't just list advantages and disadvantages. Think about the situation. Think about the appropriateness. Think about those 5,000 construction companies going bust because they made the wrong choice.

Then write an answer that shows you actually understand why matching finance to purpose isn't boring theory - it's survival.

Revision Summary

Short-term finance (up to 1 year):

• Overdrafts, trade credit, crowdfunding

• Use for: daily operations, temporary cash flow gaps

Long-term finance (more than 1 year):

• Share capital, bank loans, leasing

• Use for: expansion, buying assets, major projects

Key concepts:

• Bad debts: Money you can't recover from customers (written off as loss)

• Overtrading: Expanding too quickly without sufficient finance (leading cause of failure)

• Gearing ratio: How much debt vs equity a company has (high = risky)

• Dilution: Owning less of your company when new shares are issued

• Appropriateness: Choosing finance that matches your specific situation, not just "the best" option

Remember: The "best" source of finance depends entirely on the situation. There's no universal answer - only appropriate choices for specific circumstances.

Stay well,