Internal and external sources of finance
A source or sources of finance, refer to where a business gets money from to fund their business activities. A business can gain finance from either internal or external sources.
Internal sources of finance
Internal sources of finance refer to money that comes from within a business. There are several internal methods a business can use, including owners , and selling .
Owners capital refers to money invested by the owner of a business. This often comes from their personal savings. Personal savings is money that has been saved up by an . This source of finance does not cost the business, as there are no interest charges applied.
Retained profit is when a business makes a profit, it can leave some or all of this money in the business and reinvest it in order to expand. This source of finance does not incur interest charges or require the payment of dividends, which can make it a desirable source of finance.
Selling assets involves selling products owned by the business. This may be used when either a business no longer has a use for the product or they need to raise money quickly. Business assets that can be sold include for example, machinery, equipment, and excess stock.
External sources of finance
External sources of finance refer to money that comes from outside a business. There are several external methods a business can use, including family and friends, bank loans and overdrafts, and business angels, new partners, share issue, trade credit, leasing, hire purchase, and government grants.
Family and friends - businesses can obtain a loan or be given money from family or friends that may not need to be paid back or are paid back with little or no interest charges.
A bank loan is money borrowed from a bank by an individual or business. A bank loan is paid off with over an agreed period of time, often over several years.
Overdrafts - are where a business or person uses more money than they have in a bank account. This means the balance is in minus figures, so the bank is owed money. Overdrafts should be used carefully and only in emergencies as they can become expensive due to the high interest rates charged by banks.
Venture capital and business angels - refers to an individual or group that is willing to invest money into a new or growing business in exchange for an agreed share of the profits. The will want a return on their as well as input into how the business is run.
New partners - is when an additional person or people are brought into the business as a new business partner. This means they would provide money to then own part of the business.
Share issue - a business may sell more of their ordinary to raise money. Buying shares gives the buyer part ownership of the business and therefore certain rights, such as the right to vote on changes to the business.
A trade credit must be agreed with a supplier and forms a with them. This source of finance allows a business to obtain raw materials and stock but pay for them at a later date. The payment is usually made once the business has had an opportunity to convert the raw materials and stock into products, sell them to its own customers, and receive payment.
Leasing - is a way of renting an asset that the business requires, such as a coffee machine. Monthly payments are made and the leasing company is responsible for the provision and upkeep of the leased item.
Hire purchase - is used to purchase an asset, such as a delivery van or piece of equipment. A deposit is paid and the remaining amount for the asset is paid in monthly instalments over a set period of time. The business does not own the item until all payments are made.
Government grants - are a fixed amount of money awarded by the government. Grants are given to a business on the condition that they meet certain criteria such as providing jobs in areas of high unemployment. These do not usually need to be paid back.
