Sources Of Finance

Question 1

External finance

Answer 1

Refers to funds that are sourced from outside the business, that is from liabilities.

Trade credit: refers to the facility offered by the suppliers that allow its customers to purchase goods or service immediately, and then pay at a later date.

Advantages:

• Allows immediate access to goods/services
• Allows business time to generate sales before payment is required

Disadvantage:
- trade credit can only be used for purchases with that supplier.

Question 2

Internal finance

Answer 2

Refers to funds that are generated from within the firm itself, that is, from owners equity.

Capital contribution: refers to funds contributed by the business owner to commence, support or expand business operations.

Advantage: no interest charge
Disadvantage: limited to the resource of the owner