2.1 to 2.3 Finance Flashcards
What is internal finance?
Raised by using the owners own money, selling assets or putting profits back into the business
What are 3 examples of internal sources of finance?
- Owners capital
- Selling assets
- Retained profit
What is owners capital?
Money the owner(s) invest in the business, often from their personal savings
What are advantages of owners capital?
- No interest payments or need to repay
- Quick and convenient
What are disadvantages of owners capital?
- Amount available is likely to be limited
- Can cause friction if there is more than one owner and all cannot contribute the same amount
What is selling assets?
When businesses sell some of their assets to generate capital
e.g - machinery, factories
What are advantages of selling assets?
- Businesses don’t need to pay interest
- Cheap source of finance
What are the disadvantages of selling assets?
- Can take a long time to sell the asset so not a short term solution
- Business no longer owns the asset so production efficiency will decrease
What is retained profit?
Profit which has been made in previous years, then reinvested
What are advantages of retained profit?
- No interest
- No loss of ownership
- Available immediately
What are the disadvantages of retained profit?
- Reduces payment to shareholders
- Amount available is limited
- Once used not available for alternative purposes
What is external finance?
Finance that comes from outside the business
What are 6 sources of external finance?
