finance sources - A Level Business Revision Notes

External Finance:

Finance obtained from outside the business, usually involving repayment, interest, or loss of ownership.

Family & Friends:

Informal finance provided by relatives or close contacts.

• Pros: Low or no interest; flexible repayment terms; quick access
  
  

• Cons: Risk of damaged personal relationships; limited funds

Bank Loans:

Borrowed capital from a bank repaid over time with interest.

• Pros: Large sums available; ownership retained; fixed repayment schedule
  
  

• Cons: Interest increases costs; requires strong business plan and credit history

Mortgages:

Long-term secured loan used to purchase property, with the asset as collateral.

• Pros: Lower interest rates; suitable for long-term investment
  
  

• Cons: Risk of repossession if repayments fail; long-term commitment
  
  

Overdraft:

Short-term borrowing allowing a business to spend beyond its bank balance up to an agreed limit.

• Pros: Flexible; useful for short-term cash flow problems
  
  

• Cons: High interest rates; can be withdrawn at short notice
  
  

Peer-to-Peer (P2P) Lending:

Online platforms that connect businesses directly with individual lenders.

• Pros: Faster access to finance; fewer formal requirements than banks
  
  

• Cons: Interest charged; platform fees apply
  
  

Business Angels:

Wealthy individuals who invest in start-ups in exchange for equity or convertible debt.

• Pros: Willing to take high risks; provide expertise, advice, and contacts
  
  

• Cons: Loss of ownership; reduced control over decision-making
  
  

Crowdfunding:

Raising small amounts of money from a large number of people via online platforms.

• Pros: Suitable for start-ups; builds customer awareness and loyalty
  
  

• Cons: High competition; funding targets not guaranteed
  
  

Joint Ventures / Strategic Partnerships:

Two or more businesses sharing finance and resources for a common project.

• Pros: Access to large finance; shared expertise and market knowledge
  
  

• Cons: Shared control and profits; potential conflicts or takeover risk
  
  

Debentures:

Long-term loan agreement with fixed interest, repaid by a specified date.

• Pros: Fixed repayments aid budgeting; ownership retained
  
  

• Cons: Interest depends on credit rating; default risks asset seizure
  
  

Share Capital:

Raising finance by selling shares to investors.

• Pros: Large amounts of capital; no repayment required
  
  

• Cons: Ownership diluted; shareholders gain voting and control rights
  
  

Venture Capital:

Finance provided by specialist investors to high-growth businesses.

• Pros: Very large sums available; strategic guidance provided
  
  

• Cons: Significant loss of control; pressure for rapid growth
  
  

Leasing:

Renting assets instead of purchasing them outright.

• Pros: No large upfront cost; maintenance often included
  
  

• Cons: More expensive long term; no asset ownership
  
  

Trade Credit:

An agreement allowing businesses to buy goods now and pay suppliers later.

• Pros: Interest-free short-term finance; improves cash flow
  
  

• Cons: Loss of early-payment discounts; damaged supplier relationships if late

Grants:

Funds provided by governments or organisations that do not need to be repaid.

• Pros: No repayment or interest
  
  

• Cons: Strict conditions on usage; difficult to obtain

Internal Sources of Finance (AS Level)

Internal Finance:

Finance raised from within the business, without borrowing or selling ownership.

Owner’s Capital:

Money invested by the owner from personal savings.

• Pros: No interest payments; full ownership and control retained
  
  

• Cons: Limited by personal wealth; high personal financial risk

Retained Profit:

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

• Pros: No interest or repayment; no loss of control
  
  

• Cons: Depends on profitability; shareholders may be dissatisfied

Sale of Assets:

Selling unused or non-essential assets to raise cash.

• Pros: Quick source of finance; improves liquidity
  
  

• Cons: Reduces productive capacity; one-off source

Cost Reduction / Cutting Expenses:

Reducing operating costs to free up internal funds.

• Pros: Improves cash flow; increases efficiency
  
  

• Cons: May lower quality or employe morale
  
  

Improved Working Capital Management:

Better control of cash, inventories, and receivables.

• Pros: Releases cash tied up in the business; no external risk
  

• Cons: Limited amount available; may strain supplier or customer relationships