Internal & External Sources of Finance

Question 1

Retained Profit

Answer 1

Internal: Part of the after-tax profits of a business that is not distributed to share-holders.

Question 2

Net Current Assets

Answer 2

Internal: Money within the business on a day-to-day basis.

Question 3

Sale of Assets

Answer 3

Internal: Selling assets owned by the business.

Question 4

Owners Capital

Answer 4

External: Money from the owner/savings.

Question 5

Loans

Answer 5

External: Money from a bank/financial institution.

Question 6

Crowd-funding

Answer 6

External: Attracting investment from a large number of people with small individual amounts.

Question 7

Mortgages

Answer 7

External: Long-term loan for a property purchase.

Question 8

Venture Capital

Answer 8

External: Investment from an experienced entrepreneur like Dragons Den.

Question 9

Debt-factoring

Answer 9

External: Selling on business debts to a debt collection company.

Question 10

Hire Purchase

Answer 10

External: Paying to use an asset in monthly instalments, paying off at the end.

Question 11

Leasing

Answer 11

External: Renting equipment/assets on a monthly basis.

Question 12

Trade Credit

Answer 12

External: A period of 30 days to pay off your bills to suppliers.

Question 13

Grants

Answer 13

External: Lump-sum of money offered by government or charitable organisations.

Question 14

Donations

Answer 14

External: Voluntary money given by charities or social entrepreneurs.

Question 15

Peer-to-peer (P2P) Lending

Answer 15

External: One business person lending to another in return for interest payments.

Question 16

Invoice Discounting

Answer 16

External: Reductions offered to customers.

Question 17

Internal Source of Finance

Answer 17

Money and finance generated from withing the operations of the business itself.

Question 18

External Source of Finance

Answer 18

Money and finance generated from outside the business and its direct operations.

Question 19

Finance

Answer 19

Money or capital are also used. Finance is the amount of money in the business from various sources.

Question 20

Advantage of Owners Capital

Answer 20

No interest/debt repayments giving owner full control without owing anyone.

Question 21

Disadvantage of Owners Capital

Answer 21

Risk of personal financial loss.

Question 22

Advantage of Loans

Answer 22

Allows business to access large amounts of money quickly for growth or operations.

Question 23

Disadvantage of Loans

Answer 23

Must be repaid with interest, which could strain cash flow and add financial pressure to the business.

Question 24

Advantage of Crowd-funding

Answer 24

Can raise funds without needing traditional loans or giving up ownership, can also create a loyal customer-base early on.

Question 25

Disadvantage of Crowd-funding

Answer 25

Success not guaranteed, can take significant effort and marketing to attract enough supporters to reach the funding goal.

Question 26

Advantage of Mortgages

Answer 26

Allows business to acquire property without paying the full cost upfront.

Question 27

Disadvantage of Mortgages

Answer 27

Property can be repossessed if the business fails to meet the repayment obligations.

Question 28

Advantage of Venture Capital

Answer 28

Can provide significant funding to help a business grow quickly.

Question 29

Disadvantage of Venture Capital

Answer 29

Founders lose some control over their business. Venture capitalists may want a say in important decisions.

Question 30

Advantage of Debt-factoring

Answer 30

Quick access to cash, helping manage cash flow and cover expenses without additional debt.

Question 31

Disadvantage of Debt-factoring

Answer 31

Receives less money than the full value of their receivables which reduces overall profits.

Question 32

Advantage of Hire Purchase

Answer 32

Allows businesses to use equipment or goods right away without a large upfront payment.

Question 33

Disadvantage of Hire Purchase

Answer 33

Total cost of item can end up being higher than if purchased outright.

Question 34

Advantage of Leasing

Answer 34

Allows businesses to access the latest equipment or technology without large upfront cost.

Question 35

Disadvantage of Leasing

Answer 35

Can be more expensive than buying outright & the business never owns the item.

Question 36

Advantage of Trade Credit

Answer 36

Allows business to stock up on inventory or supplies without immediate cash outflow, which can help with cash flow management and operational efficiency.

Question 37

Disadvantage of Trade Credit

Answer 37

If payments are not made on time, it can harm relationships with suppliers.

Question 38

Advantage of Grants

Answer 38

Essentially “free money”, does not require repayment or interest, allows businesses to grow without burden.

Question 39

Advantage of Donations

Answer 39

Does not need to be repaid.

Question 40

Disadvantage of Donations

Answer 40

Unpredictable and inconsistent, hard to rely on them for stable long-term funding.

Question 41

Advantage of Peer-to-peer (P2P) Lending

Answer 41

Easier to access funds compared to traditional bank loans.

Question 42

Disadvantage of Peer-to-peer (P2P) Lending

Answer 42

Interest must still be paid, if business defaults it could hurt its reputation and credit score.

Question 43

Advantage of Invoice Discounting

Answer 43

Provides a quick access to cash tied up in unpaid invoices, helping with cash flow.

Question 44

Disadvantage of Invoice Discounting

Answer 44

Comes with fees & interest, can reduce overall profits.