2.1.1 Internal finance - sources of finance

Question 1

Why do businesses need finance

3 mains reasons

Answer 1

• get the business started
• run the business
• expand the business

Question 2

Difference between source & method of finance

Answer 2

-source of finance is the Provider

-Method - The way in which the provider gives you the money is the Method

E.g Bank is the source
method is the overdraft or a loan

Question 3

Internal finance

Answer 3

Money generated by the business or it’s current owners

Question 4

3 sources of internal finance

Answer 4

1) Retained profits
2) Owners capital
3) Sale of assets

Question 5

Retained profits

Answer 5

The profit that is retained and put back into a business and not returned to the owners

Question 6

Advantages of retained profits

2

Answer 6

• Free source of finance that the business doesn’t have to pay interest on it
• Still keep control of business

Question 7

Disadvantages of retained profits - 2

Answer 7

• It is limited - a business can only spend profits that have been saved + not may be enough on it’s own to fund expansion
• Shareholders may object to using retained profits. - may wish to have it back in the form of dividends so conflict may arise

Question 8

Owners capital

Answer 8

The money provided by the owners of a business (personal savings)

Question 9

What types of businesses use owners capitals

WHY

Answer 9

Sole traders ,Partnerships when they are first starting up as they’re often relatively small businesses

• might not be able to access other sources of finance

Question 10

Advantages of owners capital -2

Answer 10

1) Easy to access 2) doesn’t have to be repaid

+ no interest incurred

Question 11

Disadvantages of owners capital -2

Answer 11

• risky entrepreneur to put a significant amount of their personal savings into businesses
• Limited amount- depends on amount owner saved up/ their wealth

Question 12

Sale of assets

Answer 12

When a business sells it’s assets to raise finance e.g factories, machinery’s

Question 13

What type of businesses is sale of assets appropriate for

Answer 13

Appropriate for businesses with spare assets

• therefore not appropriate for new businesses

Question 14

Advantages of sale of assets - 2

Answer 14

• Cheap source of finance as no interest needs to be paid when selling
• Can raise a considerable large sum amount of money which can then be invested back into other areas of the business

Question 15

Disadvantages of sale of assets - 2

Answer 15

• Can harm business productions + operation if assets needed
• Time consuming looking for suitable buyer - may reduce value as well when finally found cuz of the ‘rush’ to raise finance