Internal and External Sources of Finance Flashcards
Retained profit
Internal
Advantages
No interest charges
Immediately available
Only available for the amount the business has accumulated, avoids debt
Disadvantages
Amount available is limited
Reduces payments to shareholders, which causes dissatisfaction
Once used it is not available for another purpose
Net Current Assets
Internal
Advantages
Encourages the business to manage cash flow effectively
Disadvantages
Puts pressure on customers with shorter credit terms which negatively impact relationships with suppliers if longer credit terms are negotiated
Lower stock holding can affect the businesses ability to meet customer needs
Sale of assets
Internal
Advantages
No interest charges
Reduces capital tied up in assets, releasing it for other purposes
Can mean disposing of an asset no longer to use to the business
Owner’s Capital
External
Advantages
No interest payments or need to repay
High level of commitment from the owner
Disadvantages
Amount available is likely to be limited
If more than one owner and not all can contribute the same amount which causes friction
Loans
External
Advantages
Regular pre-agreed repayments making planning and budgeting easier
Ownership or control is not lost
Disadvantages
Interest is charged on the amount borrowed
Interest rates can fluctuate
Often secured against an asset which can be seized if repayments are missed
Interest has to be paid regardless of whether a profit is made
Crows-funding
External
Advantages
Offers the ability to raise finance from a large number of investors
No interest is paid as investors will only be rewarded if the business is sold at a later date
Disadvantages
Partial loss of ownership
No guarantee that it will attract sufficient investment to meet the proposal
Mortgages
External
Advantages
Large amounts of finance can be raised and paid over a long period of time
Ownership or control is not lost
Disadvantages
Interest is charged on the amount borrowed
Interest rates can fluctuate
Often secured against an asset which can be seized repayments are missed
Interest has to be paid regardless of profit made
Not suitable for small amounts or as a short-term source of finance
Venture Capital
External
Advantages
Finance is provided by a business professional who will often offer advice and mentoring alongside the investment
Venture capitalist are often risk takers and may see potential in high risk investment that other investors including bank won’t be willing to invest in it
Disadvantages
Partial loss of ownership and control
Conflict can arise between entrepreneur and venture capitalise regarding the direction and day-to-day running of the business
Debt factoring
External
Advantages
Speeds up the flow of cash into the business from debts
The factor company takes on the risk of bad debt
Disadvantages
Only receive a percentage of the amount owed, therefore reducing profits
Can give the wrong impression or alienate customers
Hire purchase
External
Advantages
Avoids the need to pay a lump sum for the use of an asset
Regular instalments make planning and budgeting easier
Spreads the cost of an asset over its useful life
Disadvantages
Overall amount paid for the use of an asset is likely to be higher than if purchased outright
Leasing
Responsibility for maintaining and repairing the asset stays with supplier
Spreads cost of asset over its life to avoid paying a lump sum up front
Disadvantages
Overall amount paid for use of asset is likely to be higher than if purchased outright
Never actually own the asset and therefore payments are ongoing
Trade credit
External
Advantages
Delays the need to pay for goods and services purchased, therefore aiding cash flow
No loss of ownership or control
Disadvantages
Potential loss of discounts offered for cash payments
Only suitable as short term source of finance
Grants
External
Advantages
No need to repay
No interest charged
No loss of ownership or control
Disadvantages
Often requires a lengthy application process
Might only be rewarded if certain conditions are met affecting the way the business operates on a day-to-day basis
Donations
External
Advantages
No need to pay
No interest charges
No loss of ownership or control
Disadvantages
Likely to be small amounts only
Unpredictable
Peer-to-peer lending
External
Advantages
Interest rates can be lower than lending from a traditional financial institutions
Fixed rate of interest can be agreed making it easier to plan and budget
Disadvantages
Amounts available may be limited and provided for a short period of time only
