2.1.1 internal finance

what are some reasons for raising finance?

• to pay debts - likely to be a consolidation loan which may pay off suppliers

• to help a business over a slow trading period - overdraft

• to expand - a business may apply for long term finance such as a loan

• to start-up - a business may apply for a loan with a business plan or ask friends and family to invest

• to buy stock - a business would ask a supplier for trade credit, typically 30, 60, 90 days

what is owners’ capital?

• also known as owners’ equity

• shows the stake the owner has in the business

• represents the net assets of the company

• the owner may have used savings or a redundancy pay-out to start up the business

what are retained profits?

• internal source of finance

• re-investing profits back into the business to help it grow

what is the advantage of retained profits?

• there is no interest to pay

what is the disadvantage of retained profits?

• once it is used it has gone - opportunity cost

what is sale of assets?

• internal source of finance

• a business can raise finance by selling items that they already own

• e.g. machinery, land, premises, vehicles

• the business that sells the asset will no longer have the benefit of that asset and it will not appear on the balance sheet of the company

how can friends and family be an internal source of finance?

• private limited companies are able to raise finance by selling shares to friends and family

• a sole trader or partnership may also find that their family may want to contribute to the business

• this may be for interest, a share of the profits or maybe even an interest free loam amongst family

what is the advantage of friends and family?

• the owner may still keep control of the business and may be better able to trust their business investors

what is the disadvantage of friends and family?

• it may cause tension and problems if the finance is not repaid or the business does not flourish