Research and explain the following internal and external sources of finance for business.
Sources of Description of features Advantages
Finance
INTERNAL
Net current The difference between current assets and current liabilities, also You have more flexibility, enabling you to
assets known as working capital. satisfy your customers’ orders, expand
your business, and invest in new products
and services. It also provides a cushion for
when your company needs a bit of extra
cash.
Retained The retained earnings of a corporation is the accumulated net They are cheap (though not free) –
profits income of the corporation that is retained by the corporation at a effectively the "cost of capital" of retained
particular point of time, such as at the end of the reporting period. profits is the opportunity cost for
shareholders of leaving profits in the
business
Sale of assets An asset sale occurs when a company sells some or all of its actual Clean credit, reputation, workers
assets, either tangible or intangible. compensation rating, etc. The new owner
has a fresh start. If the prior owner had a
high workers compensation risk rating,
had a poor reputation for food quality and
service, and/or had poor credit, the new
owner will not be penalized for these
items, and will start out with a clean
record.
EXTERNAL
Owners money Owner investment or capital is money that is invested by the owner Does not need to be paid back
Disadvantages
The disadvantages to negative
working capital range from paying
your suppliers late to the threat of
bankruptcy/liquidation
For profits to build up to use in
this way can take too long and
good business opportunities
missed
No established credit. When
you’re starting a new business,
unless you have had a prior
business with a good credit
history, initially it will be harder to
get credit.
Personal savings may be lost if the
 from their own personal funds. Full control of the business is maintained business is unsuccessful

Overdraft A bank overdraft is a facility that will allow you to withdraw more Can be arranged quickly Expensive as a high rate of daily
money from your account than is available. A bank overdraft is a interest is charged
short term source of finance.
Usually only available for small
sums of money

Loan A bank loan is a long term source of finance. It is a fixed amount of Can be arranged quickly Interest has to be paid in
money that is given to a business by the bank that has to be repaid addition to the loan amount
over time with interest, usually in monthly instalments. Loan can be repaid over a long period of
time

Trade credit Trade credit is the credit extended to you by suppliers who let you Minimal Cash Outlay. Trade credit Fees and Penalties.
buy now and pay later. Any time you take delivery of materials, financing provides a way for you to keep
Loss of Trade Credit Privileges
equipment or other valuables without paying cash on the spot, the shelves of your business stocked or
you're using trade credit. build a product without a huge outlay of
cash up front.

Mortgages A mortgage is a long term source of finance. It is a sum of money Mortgage is given for a long period of Interest is charged Property can
borrowed from the bank that is secured against a property and paid time be lost to the mortgage lender if
back in instalments, usually over a long period of time. repayments are missed on the
Large amounts of finance can be raised loan
quickly

crowdfunding Crowd funding involves getting small amounts of finance from a Access to large amount of investor A public request for investment
large amount of people. This is usually done through social media risks your project being copied by
or crowd funding websites. Crowd funding investors may: Fast way to raise finance competitors

If the targeted amount isn’t

reached the money is returned to
investors and the business gets
nothing

Venture capital Venture capital is money that investors provide to a company that Available for more risky investment Venture capitalists may want a
 is starting up or expanding. Venture capital is usually used when share of the business meaning
there is an element of risk with the business. some control may be lost

A larger return may be required

due to the high risk nature of the
investment

Share Issue Share issue is a source of finance that is only available to private or Finance raised does not need to be paid Shareholders need to be paid a
public limited companies. Such businesses can decide to issue more back dividend each year
shares in the company and obtain finance from their sale.
Large amounts of finance can be raised Shareholders become part owners
of the business

Debt factoring Debt factoring is an alternative term to invoice factoring and takes Improved cash flow, Shorten the cash Reduced bottom line
place when accounts receivables, typically in the form of invoices, flow cycle, Quick purchasing, Rapid
are raised by a business and passed to a debt factoring company for expansion, Improvement, Debt Third party involvement
them to provide a cash advance – up to 100% of the invoices' value. protection, Cost-effective admin, Cost- Customer service
effective debt collection, Peace of mind,
Finance options Liability for bad debt

Hire purchase Hire purchase is used to purchase an asset, such as a delivery van or Expensive assets can be purchased and Interest is charged on hire
piece of equipment. A deposit is paid and the remaining amount for paid back over time purchase items
the asset is paid in monthly instalments over a set period of time.
Equipment is not owned until the
The business does not own the item until all payments are made.
final payment is made

Donations A donation is a gift for charity, humanitarian aid, or to benefit a Public recognition and trust. Charities are A lock on assets. Organisations
cause. widely recognised as existing for social with charitable status cannot use
good. assets for any purpose other than
the pursuit of charitable
objectives.

Peer to peer Peer-to-peer lending (P2P) is a way for people to lend money to Online application for a P2P loan is fast You still need to pass a credit
lending individuals or businesses. You - as the lender - receive interest and and convenient. check and other internal checks to
you get your money back when the loan is repaid.
 You may be able to access lower rates secure the loan

Getting an initial quote will not affect your You may need to pay an
credit score. ... application fee

P2P lending provides another option for a

loan to traditional lenders.

Invoice Invoice discounting is an invoice finance facility that allows business Fast cash, released locked finances, short Decreases profits, industry
discounting owners to leverage the value of their sales ledger. When you send turnaround time, no risk to assets, boost sentiment, volatile
out an invoice to your customer, a proportion of the total amount credit sales
becomes available from the lender, providing an invaluable source
of working capital throughout the month.

Leasing Leasing is a way of renting an asset that the business requires, such Large amounts of money are not required Over time it can be a more
as a coffee machine. Monthly payments are made and the leasing up front to lease machinery expensive way to obtain assets
company is responsible for the provision and upkeep of the leased Assets are never owned by the
item. The leasing company are responsible for business
repairs and maintenance

Grants A grant is a fixed amount of money usually awarded by the Does not need to be paid back Business needs to meet certain
government, EU (European Union) or charitable organisations. criteria
Grants are given to a business on the condition that they meet
certain criteria such as providing jobs in areas of high It is time-consuming to apply for
grants and to complete the
unemployment.
paperwork