Raising Finance internal and external

Question 1

3 internal finances

Answer 1

Money that comes from inside the business

Retained profit
Sales of assets
Owners capital: personal savings

Question 2

Internal sources of finance: Retained profit

Answer 2

• Any cost left in the business after cost of sales, fixed costs, tax and financing costs have been paid. It is often used to re-invest in the business.
• this is the profit made by the business in earlier years. It is the money kept in the business rather than paying it out as dividends.
• it is the best way to finance investment into a firms future
• logically then, the higher the profit the more likely it is that it can finance its expansion from within

Question 3

Internal sources of finance: sales of assets

Answer 3

• This is using a business’ assets and selling them off. They may sell buildings, land, vehicles and machinery that is no longer needed.
• It is a way of upgrading and is a quick way to earn cash at 0% interest.
• This may cause future problems if you need it later.

Question 4

Internal sources of finance: owners capital: personal savings

Answer 4

• This is the money put into a business by its owner or owners. This is often used when a business is first set up.
• this is limited as not many will have sufficient fundings in order to successfully rely solely on this

Question 5

External sources of finance

Answer 5

Family and friends, banks, peer-to-peer funding, Business angels, crowdfunding, other businesses

Question 6

External methods of finance

Answer 6

Loans, share capital, venture capital, overdraft, leasing, trade credit, grants

Question 7

External sources of finance: Family and friends

Answer 7

• They can provide share capital (through the selling of shares) or can lend money.
• A sole trader or partnership may find that their family want to contribute to the business. This may be for interest, a share of the profits or maybe an interest free loan amongst family.
• The majority of businesses start with a combination of owners’ capital and family and friends

Pros:

• Loans from family and friends will probably be offered without the need for security and at lower rates and over longer terms.
• They are unlikely to need a business plan and so can save the time of not wiring one.

Cons:

• You may feel pressure on the relationship, what happens to the friend of a member of family will affect them.
• They made more than money back at short notice.

Question 8

External sources of finance: banks

Answer 8

• Banks may lend a loan to a business to start-up when a business wants to grow and expand
• borrowing a large sum of money to pay interest on the money you owe
• thanks mate only provide a business with an overdraft to help when they have cash flow problems

Pros:

• Re-payment plans available to suit the business
• Banks will allow the business to continue running on their own, not interfere, owners retain control of the business (unlike business angels)

Cons:

• If it is a start-up business then the owner may need to use their own assets as security for the loan (e.g. their house)
• loans can be very expensive compare to other sources, interest will be paid back on time.