Internal & External Sources of Finance Flashcards
Retained Profit
Internal: Part of the after-tax profits of a business that is not distributed to share-holders.
Net Current Assets
Internal: Money within the business on a day-to-day basis.
Sale of Assets
Internal: Selling assets owned by the business.
Owners Capital
External: Money from the owner/savings.
Loans
External: Money from a bank/financial institution.
Crowd-funding
External: Attracting investment from a large number of people with small individual amounts.
Mortgages
External: Long-term loan for a property purchase.
Venture Capital
External: Investment from an experienced entrepreneur like Dragons Den.
Debt-factoring
External: Selling on business debts to a debt collection company.
Hire Purchase
External: Paying to use an asset in monthly instalments, paying off at the end.
Leasing
External: Renting equipment/assets on a monthly basis.
Trade Credit
External: A period of 30 days to pay off your bills to suppliers.
Grants
External: Lump-sum of money offered by government or charitable organisations.
Donations
External: Voluntary money given by charities or social entrepreneurs.
Peer-to-peer (P2P) Lending
External: One business person lending to another in return for interest payments.
Invoice Discounting
External: Reductions offered to customers.
Internal Source of Finance
Money and finance generated from withing the operations of the business itself.
External Source of Finance
Money and finance generated from outside the business and its direct operations.
Finance
Money or capital are also used. Finance is the amount of money in the business from various sources.
Advantage of Owners Capital
No interest/debt repayments giving owner full control without owing anyone.
Disadvantage of Owners Capital
Risk of personal financial loss.
Advantage of Loans
Allows business to access large amounts of money quickly for growth or operations.
Disadvantage of Loans
Must be repaid with interest, which could strain cash flow and add financial pressure to the business.
Advantage of Crowd-funding
Can raise funds without needing traditional loans or giving up ownership, can also create a loyal customer-base early on.
Disadvantage of Crowd-funding
Success not guaranteed, can take significant effort and marketing to attract enough supporters to reach the funding goal.
Advantage of Mortgages
Allows business to acquire property without paying the full cost upfront.
Disadvantage of Mortgages
Property can be repossessed if the business fails to meet the repayment obligations.
Advantage of Venture Capital
Can provide significant funding to help a business grow quickly.
Disadvantage of Venture Capital
Founders lose some control over their business. Venture capitalists may want a say in important decisions.
Advantage of Debt-factoring
Quick access to cash, helping manage cash flow and cover expenses without additional debt.
Disadvantage of Debt-factoring
Receives less money than the full value of their receivables which reduces overall profits.
Advantage of Hire Purchase
Allows businesses to use equipment or goods right away without a large upfront payment.
Disadvantage of Hire Purchase
Total cost of item can end up being higher than if purchased outright.
Advantage of Leasing
Allows businesses to access the latest equipment or technology without large upfront cost.
Disadvantage of Leasing
Can be more expensive than buying outright & the business never owns the item.
Advantage of Trade Credit
Allows business to stock up on inventory or supplies without immediate cash outflow, which can help with cash flow management and operational efficiency.
Disadvantage of Trade Credit
If payments are not made on time, it can harm relationships with suppliers.
Advantage of Grants
Essentially “free money”, does not require repayment or interest, allows businesses to grow without burden.
Advantage of Donations
Does not need to be repaid.
Disadvantage of Donations
Unpredictable and inconsistent, hard to rely on them for stable long-term funding.
Advantage of Peer-to-peer (P2P) Lending
Easier to access funds compared to traditional bank loans.
Disadvantage of Peer-to-peer (P2P) Lending
Interest must still be paid, if business defaults it could hurt its reputation and credit score.
Advantage of Invoice Discounting
Provides a quick access to cash tied up in unpaid invoices, helping with cash flow.
Disadvantage of Invoice Discounting
Comes with fees & interest, can reduce overall profits.
