internal and external sources of finance Flashcards
internal sources of finance
money available within a business
retained profit
profit kept in a business to fund future expenditure
advantages of retained profit
no interest charged and available immediately. and only available for the amount already accumulated so avoids debt.
disadvantage of retained profit
amount available may be limited, once used it is not available for alternative purchase.
net current assets
current assets minus current liabilities shows the money available in the business to fund day to day expenditure
advantages of net current assets
encourages business to manage cash flow effectively
disadvantages of net current assets
lower stock holding can affect the firms ability to meet customer needs
sale of assets
selling an item of worth owned by a business for an immediate cash injection
advantages of sale of assets
no interest, could dispose of an asset that is no longer in use to the business, reduces capital tied up in assets making it useful for other purposes
disadvantages of sale of assets
it is likely that amount received is not a true reflection of the value of the asset, can increase costs in long run if an asset needs to be leased back.
external sources of finance
sources of finance available from outside the business
owners capital
money invested in the business from the owner’s personal savings
advantages of owners capital
no interest payments/ need to repay, high level of commitment
disadvantages of owners capital
amount available is likely to be limited, if more than one owner is could cause friction as everyone might not be able to contribute the same amount
loans
money borrowed from a financial institution
advantages of loans
regular pre agreed repayments make planning and budgeting really easy, Ownership or control is not lost
disadvantages of loans
interest is charged on amount borrowed, interest rates fluctuate, often secured against asset which can be seized if repayments are missed.
crowd-funding
involves attracting investments from a large number of speculative investors who may invest relatively small amounts. if all together it matches the amount needed then investments will be collected together
advantages of crowd funding
offers ability to to raise finance from large number of investors, no interest is paid as investors will only be rewarded if business is sold.
disadvantages of crowd funding
partial loss of ownership, no guarantee that the crowd fund will attract sufficient investments to meet the proposal
moartgages
these are long term loans, around 25 years normally and used for purchase of specific item/ asset. eg. a house
advantages of mortgages
large amounts of finance can be raised and repaid over a prolonged period of time, ownership or control is not lost.
disadvantages of mortgages
interest is charged on amount borrowed, interest rates can fluctuate, often secured against an asset which can be seized if repayments are missed, not suitable for small amounts or short term sources of finance.
venture capital
an investment from an experienced entrepreneur in return for equity of the business.
