business finance - p1

eduqas

what are internal sources of finance and their disadvantages and advantages(there is 3 )

Internal finance = finance that comes from within the business or the entrepreneur.

1. Personal savings: Money the entrepreneur invests into the business from their own savings.

Advantages: No interest payments, No debt to repay, Entrepreneur retains full control, Usually quick and easy to access.

Disadvantages: Amount available may be limited, Entrepreneur bears the financial risk, Personal savings could be lost if the business fails.

2. Retained profit: Profit kept in the business rather than paid to the owners.

Advantages: No interest payments, No debt to repay, No loss of ownership/control, No external finance provider involved.

Disadvantages: Only available to businesses that have already made profit, May not provide enough finance for major expansion, Owners receive less profit personally

3. Sale of assets: The business sells assets it already owns, such as machinery, vehicles or property, to raise finance.

Advantages: No debt to repay, Can quickly raise finance from an existing asset, Can be useful if an asset is no longer needed

Disadvantages: Business loses the use of the asset, Asset may have to be sold for less than its original purchase price, May not raise enough finance

what are external sources of finance and their disadvantages and advantages(there is 7)

External finance = finance obtained from outside the business/entrepreneur.

1.Leasing: The business pays regular payments to use an asset, such as machinery or vehicles, without owning it. The leasing company owns the asset.

Advantages: No large upfront payment, Helps preserve cash flow, Allows the business to use expensive assets without buying them, Can make replacing/updating equipment easier

Disadvantages: Business does not own the asset, Regular payments are required, Total cost may be greater than buying the asset outright, Business cannot sell the asset because it does not own it

2. Bank loans: A lump sum borrowed from a bank and repaid over an agreed period.

Advantages: Can provide a relatively large amount of finance, Repayments can be planned, Owners normally retain control of the business.

Disadvantages: Interest increases the cost of finance, Repayments must be made even if the business performs poorly, Security may be required, Increases financial risk.

3. Bank overdraft: Allows a business to withdraw more money from its bank account than it currently has. useful for short-term cash-flow problems.

Advantages: Flexible, Useful for unexpected short-term expenses, Can help manage temporary cash shortages.

Disadvantages: Interest/fees can be high., Bank may reduce or withdraw the facility., Not suitable for long-term investment.

4. Trade credit: Suppliers allow a business to receive goods/services now and pay later.

Advantages: Improves short-term cash flow, Business can sell/use stock before paying suppliers, Does not require immediate cash.

Disadvantages: Supplier may charge more or offer less favourable terms, Failure to pay on time can damage relationships/reputation., Mainly a short-term source of finance.

5. Share capital: Finance raised by a company by selling shares in the business to investors.

Advantages: Can raise large amounts of finance, No compulsory repayment of the capital, Can provide finance for long-term expansion

Disadvantages: Existing owners may lose some ownership/control, Profits may need to be shared with shareholders, Shareholders may influence business decisions, Only available to businesses that can issue shares

6. Debt factoring: A business sells the money owed to it by customers (trade receivables) to a factoring company in return for immediate cash.

Advantages: Provides immediate cash, Improves cash flow, Reduces the time spent collecting debts, Useful for businesses with significant amounts owed by customers

Disadvantages: Business receives less than the full value of the debts, Can be expensive, Customers may know that their debts have been sold, Not suitable for businesses with few credit customer

7. Venture capital: Finance provided by specialist investors to businesses with high growth potential. Investors receive an ownership stake and expect a high return.

Advantages: Can provide significant amounts of finance, Suitable for rapid-growth businesses, Investors may provide expertise and contacts.

Disadvantages: Owners give up some ownership/control, Investors may influence strategic decisions, Investors expect a high return.

what source of finance might be most suitable depending on the circumstances of a business

Start-up: Personal savings+ bank loan + leasing

Established SME: Retained profit + bank loan + overdraft + trade credit

High-growth business : venture capital + capital share

Short-term cash-flow problem: Overdraft + trade credit

finish the sentence … “the best source of finance depends on….“

Amount required: How much finance is needed?

Purpose: Is it for short-term cash flow or long-term investment?

Cost (Consider) : interest, fees, returns expected by investors

Risk : Debt requires repayments even if profits fall

Availability ; A start-up may struggle to obtain a bank loan because it lacks: trading history, assets/security, evidence of profitability.

Financial position : A profitable established business may be able to use retained profit, whereas a start-up may need external finance.