Internal Sources Of Finance

Question 1

Why do new businesses need to raise finance?

Answer 1

To buy assets needed to operate business - vehicles, machines
To pay for promotion - let consumers know about the business
To buy raw materials fuel and components needed for business to start trading

Question 2

Why do existing business need to raise finance?

Answer 2

Buy assets, raw materials, components, machinery to increase sales
To invest in developing new products and promote them
To make the business more efficient eg training employees

Question 3

Examples of internal sources of finance:

Answer 3

Retained profit
Selling unwanted assets
Trade credit

Question 4

What is retained profit?

Answer 4

Profits kept for use as a source of fufture finance

Question 5

Selling unwanted assets

Answer 5

If an asset is no longer being used by the business it can be sold to raise finance. Sales and leaseback - when a business sells an asset and and then lease it back so they can still use it.

Question 6

What is trade credit?

Answer 6

A period of time which suppers allow customers before payment for supplies must be made.

Question 7

What is one advantage and one disadvantage of trade credit?

Answer 7

A free source if finance
Only available for up to 90 days

Question 8

Advantages of selling assets

Answer 8

• money may be available quickly
• avoids interest charges

Question 9

Disadvantages of selling assets

Answer 9

Assets may not be available to business in the future
Sale and lease back requires future payments to use the assets

Question 10

One advantage and disadvantage of retained profit

Answer 10

Advantage - avoids paying interest on a loan
Disadvantage - only available to profitable businesses
Owners receive less of the profits