BUSINESS FINANCE

What is internal finance?

Money raised from within the business itself, without borrowing from outside.

Name the main internal sources of finance.

• Owner’s capital
• Retained profit
• Sale of assets

What is owner’s capital?

Money invested into the business by the owner(s).

Advantages of owner’s capital?

• No interest
• Full control retained
• Simple to arrange

Disadvantages of owner’s capital?

• Limited by personal wealth
• Higher personal risk

What is retained profit?

Profit kept in the business instead of being paid as dividends.

Advantages of retained profit?

• No interest
• Available for growth
• Strengthens financial stability

Disadvantages of retained profit?

• Reduces dividends for shareholders
• May be insufficient for large investments

What is the sale of assets?

Selling unused or surplus business assets to raise funds.

Advantages of sale of assets?

• Quick way to raise cash
• Reduces unnecessary resources

Disadvantages of sale of assets?

• Loss of productive assets
• May disrupt operations

What is external finance?

Money obtained from outside the business, often involving repayment or shared control.

Name external sources of finance.

• Overdrafts
• Loans
• Share capital
• Venture capital
• Leasing
• Trade credit
• Debt factoring

What is an overdraft?

A bank allows a business to withdraw more than it has in its account up to an agreed limit.

Advantages of an overdraft?

• Flexible
• Quick access to funds
• Interest only on used amount

Disadvantages of an overdraft?

• High interest
• Bank can demand repayment at any time
• Short-term only

What is trade credit?

Suppliers allow the business to pay later for goods or services received.

Advantages of trade credit?

• Improves cash flow
• No interest if paid on time

Disadvantages of trade credit?

• Short-term only
• Late payment can damage supplier relationships

What is debt factoring?

Selling unpaid invoices to a factor in exchange for immediate cash.

Advantages of debt factoring?

• Quick cash
• Reduces admin for debt collection

Disadvantages of debt factoring?

• Loss of profit (factor takes a fee)
• May affect customer relationships

What is a loan?

Money borrowed from a bank or financial institution, repaid with interest over time.

Advantages of a loan?

• Provides large sums
• Predictable repayment
• Suitable for expansion

Disadvantages of a loan?

• Interest must be paid
• Can affect cash flow
• Risk of debt if profits fall

What is share capital?

Money raised by selling shares of the business to shareholders.

Advantages of share capital?

• Large sums available
• No repayment obligation
• Shared risk

Disadvantages of share capital?

• Loss of control
• Dividends must be paid
• Legal obligations

What is venture capital?

Investment from private investors in exchange for equity in the business.

Advantages of venture capital?

• Large funds
• Investors may provide expertise
• Suitable for high-risk ventures

Disadvantages of venture capital?

• Loss of control
• Investors may influence decisions
• High expectations of return

What is leasing?

Paying to use an asset without owning it.

Advantages of leasing?

• No large initial cost
• Keeps assets off balance sheet
• Maintenance often included

Disadvantages of leasing?

• More expensive long-term
• Asset not owned by the business

Factors affecting choice of finance?

• Amount needed
• Term
• Cost
• Risk
• Control
• Business size
• Stakeholder impact

Why might a small business prefer internal finance?

• Avoids interest
• Keeps full control
• Simple to access

Why might a large business use external finance?

For large projects requiring sums beyond internal resources.

How does finance impact business operations?

Determines growth potential, cash flow stability, and investment capacity.

How does finance affect owners/shareholders?

Impacts control, dividends, personal risk, and equity stakes.

How does finance affect employees?

Influences job security, pay, and investment in resources.

How does finance affect creditors/lenders?

Determines repayment security and risk exposure.

How does finance affect customers?

Can improve service quality, product availability, and pricing.

How does finance affect suppliers?

Influences payment terms, reliability of orders, and relationship stability.

How does inappropriate finance affect a business?

Increases risk of bankruptcy, high costs, and poor stakeholder relationships.

How can choosing the right source of finance benefit the business?

Reduces costs, maintains control, supports growth, and protects stakeholder interests.