2/7 - Sources of finance: internal and external Flashcards
What are 4 reasons a business may need to raise finance?
- Starting up
- Growing
- Dealing with a cash flow problem
- Financing extra materials needed for a large order
What are 3 internal sources of finance?
- Owners capital (personal savings)
- Retained profit
- Sale of assets
Internal - When is owners capital generally used and how could it be provided?
For starting up. It can be provided in share capital or a loan to the business.
Internal - What is retained profit?
The profit left once all costs have been covered and dividends have been paid. It is the most common and safest source of finance for an established business.
Internal - When is sales of assets available as a source of finance?
When an established business changes its strategy cash is generated from the sale of assets that are no longer needed.
What are 6 external sources of finance?
- Family and friends
- Banks
- Peer to peer funding
- Business angels
- Crowdfunding
- Other businesses
External - What is a collateral and why are they used?
Something of value that is used a security when a loan is offered. If a business cannot repay the loan the asset is transferred to the bank.
External - What is peer to peer funding?
Usually from investors found online willing to invest in risky start ups but with high interest.
External - What are business angels?
Similar to investors in peer to peer funding, they are rich investors willing to provide capital to businesses in return of a big share and become part of the business management. E.G. Dragons from Dragons Den.
External - What is crowdfunding?
Where lots of small investors contribute to achieve a big investment usually online through sites like Kickstarter.
External - How do business receive funding from other businesses?
Some big businesses tend to look for small start up business they can invest in for a share in return.
