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internal finance
finances that come from the business
sources of internal finance
owners capital, retained profits, sale of assets
owner’s capital
-also refers to personal savings
-the owner may invest more in the business to meet specific needs e.g short term cash flow problem
cash flow
-refers to money going in and out the business
retained profits
-profits made in the organisation, in the past which are collected to re-invest back in the business
sale of assets
-the process of selling assets the business no longer needs such as buildings, machinery and/or land
advantages of internal finances
-relatively cheap
-time-efficient
-no loss of money compared to external finance (e.g paying for interest)
disadvantages of internal finance
-significant opportunity costs
-may not be sufficient to meet business needs
-rarely as tax-efficient compared to external finance
external finance
-refers to finance that comes from outside the business
sources of external finance
-family & friends, peer-to-peer funding, crowdfunding, business angels, other businesses, banks
benefits and drawbacks of family & friends as a source of finance
+it is relatively cheap compared to other methods
-relationship might be damaged (which disrupts the finance to the business)
benefits and drawbacks of peer-to-peer funding as a source of finance
+loans can be made available to business very quickly
-borrowers are charged a small fee to access this finance
benefits and drawbacks of banks as a source of finance
+may offer a short-term (overdraft) and long-term (loans) source of finance if the business qualifies
-requires a business plan before bank can offer this finance as they are reluctant to help new businesses
benefits and drawbacks of business angels as a source of finance
+can give free advice and guidance to business
+much more risk taking compared to banks
-finding the right business angels can be challenging; time consuming
-they may be involved in decision making
benefits and drawbacks of other businesses as a source of finance
+may invest large amount of finance
-loss of control (joint venture is an example)
methods of finance
-loans, share capital, venture capital, overdrafts, leasing, trade credit, grants
loans
-loans include things such as bank loans (typically repaid over 2-10 years), mortgages and debentures
share capital
-raised from the sale of shares the business has in a limited company, therefore shareholders are entitled to the dividents
benefit: large amounts of capital can be raised for the business
drawback: diminished control and ownership
venture capital
-funds provided by specialised investors in small, medium-sized businesses
benefit: easy to locate as there is many available
drawback: may be involved in decision making
overdrafts
-the amount a bank allows the business to owe when their funds are low, which is temporary (similar to borrowing)
benefit: short term finance that offers flexibility & aids cash flow
drawback: banks can limit or cancel overdrafts, especially when they predict the business is unable to pay back
grants
-government offers this finance when they need a business to achieve a specific need
benefit: do not need to be repaid
drawback: finance can only be used for that specific need
trade credit
-customers can pay for goods and services bought at a later date, typically 30 to 90 days late (e.g klarna)
benefit: interest-free
drawback: loss of suppliers as they may not agree with delayed payment system, which can result to increased costs of raw materials
leasing
-an agreement to which money is regularly paid to use an asset for the business such as machinery, vehicles, land etc.
benefit: as it is not legally owned by the business, they are not responsible for maintenance costs
drawback: it is expensive in the long run compared to the purchase of the asset alone
