Sources of finance Flashcards
What are internal sources?
Sources of money from within the business, from the owner or from previous business income
External sources
Sources of money from outside the business, from other people putting money into the business
Internal sources
Owners funds
Money put into the business from private savings of the owners started using the owners’ own savings, an inheritance or redundancy pay from a previous employer.
Advantage’s and disadvantages of Owners funds.
Advantages - there is no need to pay interest or even repay finance.
Retention of ownership by the individual
Disadvantages - Amount available may be limited
Puts stress on the day finance of the individual
Retained Profits (AKA Ploughed back profits)
When a business makes profits, the owners can decide to spend these on themselves or to use some/all of the profits to expand and improve the business
Advantages and Disadvantages of retained profits
Advantages - Internal, therefore no need to repay
Instantly available
Does not incur additional costs such as interest payments
Control is not lost
Disadvantages - May be limited funds available
Shareholders may prefer to see short term returns on their investments
Not an option for a start up business.
Sale of an asset
Some b’s will have possessions that they no longer need.
Can be sold off to raise money needed for other investments.
Assets may include: machinery, land, part of business
External sources
Bank loan
Business will borrow a lump sum of money that must be repaid over time with interest.
Bank loan
Business will borrow a lump sum of money that must be repaid over time with interest.
Advantages and Disadvantages
Advantages - Repayments in installments
Makes cash flow easier
Don’t have to issue shares
Disadvantages - Have to back up the loan with security, e.g. assets of the business
Pay back interest.
Overdraft
Pre-arranged amount of money that the business is allowed to use (when it has none). Paid back when it likes.
Advantages/Disadvantages
Advantages - Enable short-term funding
Flexibility to review the funding
Covers day to day expenses
Disadvantages - Interest charged if overdrawn, can be ended by the bank at any time.
Grants
Amount of money given by either the European, national or local government to aid in the creation of a business. Money DOES NOT have to be paid back.
