6.1 - Sources of Finance

Internal Source of Finance

Money that comes from within the business

Cash Flow

The movement of money into and out of a business in a given period of time

Retained profits

Profit kept by the business to fund future purchases

Retained profits: Benefits (4)

No interest

Available instantly

No future costs

No repayment

Retained profits: Drawbacks (4)

Depends on profits

Less dividends to share

One off payment may harm cashflow

Less cash for future use

Owners Funds

Personal money from the owner of the company

Owners Funds: Benefits (3)

No interest

Available instantly

No repayment

Owners Funds: Drawbacks (2)

Life savings reduced

Limited amount

Selling assests

Selling what you own for cash

Selling assests: Benefits (4)

No interest

Effecient

Space for more useful assets

Possibly quick

Selling assests: Drawbacks (3)

Assests may be useful

May need leasing (renting) back

May struggle to sell at reasonable price

Mortgage

a long-term loan used to buy property that is secured against the property itself, meaning the property acts as collateral

Mortgage: Benefits (2)

Possible fixed interests

Structured repayment

Mortgage: Drawbacks (2)

Lenders may want a collateral (a security net)

Not owned until debt is fully paid

Hire purchase

Buying an asset in installment

Hire purchase: Benefits (3)

Upfront cost is reduced

Spread cost

Improve cash flow

Hire purchase: Drawbacks (3)

High interest

Higher long-term cost

Asset is not owned until installments are fully paid off

Trade Credit

The time period given by suppliers before supplies need to be paid for

Trade Credit: Benefits (3)

Access supplies without immediate payment

No interest

Improved cash flow

Trade Credit: Drawbacks (5)

Lose discounts for quick payment

Short term

Depends on supplier

Usually small amounts

Tension if you push for too much time