Internal and external finance

define capital

finance provided to the business so that it can operate over the long term.

define internal finance

money generated by the business or the current owners.

what is retained profit?

profit after tax that is put back into the business and not returned to the owners.

its a flexible source of finance and does not have to be used immediately.

for a small business this may mean owners have less money to fund their lifestyle and for a limited business shareholders receive lower dividends.

what is sale of assets?

selling unwanted assets to raise finance such as machinery, obsolete stock, land and buildings no longer required.

what is sale and leaseback?

selling an asset that the business still needs to a specialist company who leases the asset back to the business. so instant cash for the seller and the responsibility of maintenance passes to the new owner.

what are the advantages of internal finance?

1. the capital is available immediately

2. cheap as no interest or administrative costs

what are the disadvantages of internal finance

1. internal finance can be limited, a business may not be sufficiently profitable and require all their assets.

2. internal sources are not tax-deductible.

what’s the difference between revenue expenditure and capital expenditure?

capital expenditure is spending on business resources that can be re used over a long period of time whereas revenue expenditure is spending on business resources that’s have already been consumed or will be consumed shortly.

what is external finance?

money raised from outside the business, its only likely to be available once the business is established and appears trustworthy to lenders.

what are the 6 sources of finance?

family and friends

banks,

peer-to-peer lending (unsecured loans, all transactions take place online),

business angels,

crowd funding (businesses or groups invest in particular ventures),

other businesses

what are some methods of finance?

loans (bank loans, mortgages, debentures),

share capital (ordinary shares, preference shares, deferred shares),

venture capital, (private equity financing in start up stages of a business, risk and reward)

bank overdraft

leasing,

trade credit,

grants.

advantages and disadvantages of leasing

advantages: no large sums ofd money are needed to buy the use of equipment and maintenance costs are not the responsibility of the user.

disadvantages: over a long period of time it’s more expensive and loans cannot be secured on assets which are leased.

define authorised share capital.

the maximum amount that can be legally raised.

define issued share capital.

the amount of current share capital arising from the sale of shares.