Business finance (UK)

By:

James Knight

James is a lead editor for Invezz, where he covers topics from across the financial world, from the stock… read more.

Updated: Aug 20, 2021

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The provision of money for commercial use. The capital requirements of business may be divided into short and medium term or long term. Short-term capital consists of the current liabilities of a business plus medium-tem capital. The main sources of short- and medium capital (for a company) can be further subdivided into internal and external.

Internal: Retained earnings, including accrued expenses and tax reserves. External: Temporary loans from sister companies, directors and others, factoring; bills of exchange; trade creditors and expense creditors; andshort-term trade investments. Short-term capital should in theory only be used for investment in realtively liquid assets so that it is readily available to discharge the libality if necessary. Thus, these sources of short-term capital may be used for finsihed goods in stock and work in progress, trade debtors, pre-paid expenses, cash in handand at the bank.

Correspondingly, the main sources of long-term libailities or capital can be subdivided in the same way:

Internal: Reserves, retained earnings and depreciation provisions. External: Share capital, i.e. ordinary shares, preference shares, long-term loans including mortages, lease-back arrangements and debentures. Long-term capital may be used for ling-term investment in fixed assets – land, buildings, plant equipment and machinery, etc. – in goodwill, patents and trademarks and in long-term trade investments.

There are important differences in the source of capital open to large and small firms. The latter do not have access to the stock exhange and rely more heavily upon family and firends for equity capital, as well as upon commercial banks. The main institutional sources of business finance are the commercial banks, the merchant banks, the finance houses, the discount houses, factoring companies and the institutions concerned with new issues. Insurance companies and pension funds hold a large proportion of all quoted securities. A number of other institutions specialize in providing term loans and risk capital, especially for innovation and smaller businesses, e.g. the National Research and Development Corporation , Industrial and Commercial Finance Coporation.

Reference: The Penguin Dictionary of Economics, 3rd edt.