Internal & External Finance
Internal & External Finance
Finance raised from sources outside of the business.
An arrangement that allows you to spend more money than you have in your bank account up to a limit if needed
Flexible and good for short term. Can be used for single day if cash flow problem
Quick and easy to arrange
Interest only paid on amount of overdraft being used
Security not usually required
Higher interest rates than loans so not good long term
Bank can ask for repayment at any time
An agreement to borrow a fixed sum of money over an agreed time period. Interest is charged and the business would be expected to make regular repayments to repay the debt. Security is usually required for a loan. If business has assets these will be collateral if not collateral will be personal.
Lower interest rates than overdrafts because of the collateral
Don't have to share the profit or control of business unlike when shares are sold
Interest has to be paid so more expensive than alternatives
Collateral will be required so may limit the amount the business can borrow
Sum of money given to a business for a specific purpose. As long as you fulfil necessary condition then you don't have to repay the grant
Don't need to repay it
Hard to obtain
Lots of competition
Family and Friends
Can provide share capital or can lend money
May provide finance when bank unwilling to
Cause strain and tension on relationships
PlCs and LTDs can sell ordinary shares. Ordinary share capital is when money is given to a company by a shareholder in return for a share certificate that gives them part ownership of a company. Entitles them to a share of the profits and has one vote per share in the running of the business.
Share capital does not have to be repaid
Not necessary to pay shareholders a dividend if business can't afford it unlike loans which have to be paid regardless
Bringing new shareholders into a business can add to expertise
Collateral not needed
Decision making must be shared and original owners could lose control
Profits are shared amongst all shareholders
Finance provided to small or medium sized firms that seek growth but may be considered as risky by other lenders.
Provided in the form of loans or payments in return for shares in the business.Venture capitalists are wealthy and hope to find a successful business that they want to be involved with. Normally quite high risk and can provide experience. If just one called business angels. These businesses sometimes produce excellent returns.
Usually high risk firms that are unable to get finance from other sources
Often provide advice too
Sometimes allow interest or dividends to be delayed to support long term business growth
Often want significant share of business
Often want high interest payments or dividends
May exert too much influence so original owner loses independence.
When a business obtains goods or services from another business but does not pay for these immediately
Cheap way to boost day to day finance
Businesses may be reluctant to trade with the business if they do not get paid in good time
Agreeing to pay a fixed monthly rental for a fixed period such as three years instead of buying an asset. Keeps cash at the start. Buying hits short term cash flow hard but buying is better in the long term but for many firms short term needs outweigh long term wishes.
Cheaper in short term
More expensive in the long term
Lots of small investors put money into a new business via the internet in return for a sample product or service. In the UK Seedrs and Kickstarter are best known crowdfunding sponsors.
You can raise finance relatively quickly often without upfront fees
Raise awareness of new business
Idea could be copied if no patent or copyright
If you don't raise funding target any money raised normally returned to investors
Some companies allocate chunk of capital to early stage investments. They hope to get occasional winner from among a number of duds. Commonplace in USA not in UK
Peer to peer funding
Online matching platforms allow individuals who want to lend to be matched to individual business borrowers cutting out the bank middleman allowing lenders and borrowers to get a better deal as long as loan doesn't go sour. Works well if attractive sounding business like new restaurant if duller business investors seem less inclined to bother.
Finance raised from within the business itself. It includes; owner's capital sales of assets retained profit.
Money provided by the owner of the business from their own savings or personal wealth. Small business start ups often most practical way of raising finance particularly if owner has no previous business experience.
Cheap source of finance as no interest or sharing
Keep full control
May be only option possible
Risk of losing everything
Insufficient funds available.
Profit that is reinvested in the business rather than distributed to the shareholders or owners. Over 60% of business investment comes from reinvested profit.
Cheap no interest
Low dividends may dissatisfy shareholders
Not suitable for start up businesses
Sale of an Asset
An asset is any item owned by the firm
Asset may no longer be needed by the business so good source of finance
Could lead to lower long term profitability.
LTDs and PLCs can sell shares
Unlimited liability is when the finances of the business and the owner are seen as the same in the eyes of the law so business debts become personal debts of the owner and they may have to sell personal assets to pay off debts. Limited liability means owners aren't personally responsible for business debts. They can only lose the money they invested in the company.
A written document that set how the business will operate and what it hopes to achieve. Includes marketing production workforce and financial strategies. Outlines business objectives and includes human resources and financial considerations necessary when setting up a business venture.
Factors to consider when deciding which form of finance is most suitable.
Type of business
Amount of control desired
Existing levels of debt
Length of Time
Current methods of finance being used