Please enable JavaScript.
Coggle requires JavaScript to display documents.
Internal sources of finance, External sources of finance - Coggle Diagram
Internal sources of finance
Personal Funds
- the use of an entrepreneur's own savings
advantages- remaining private and does not have to be repaid
disadvantages- for most sole traders, personal funds are insufficient, so they need to use additional sources of finance
Retained profits
- profits that are held by a company to reserve in order to invest in the future
Advantages:
no interest charges
Available immediately
No loss of ownership
Only available up to the amount already accumulated by the business and therefore avoids debt
Disadvantages:
Amount available may be limited
Reduces payments to shareholders which may cause dissatisfaction
One used, it is not available for alternative purpose
The sale of assets
- selling of dormant assets (unused assets)
advantages- Encourages the business to manage cash flow effectively
Disadvantages:they are more time consuming than stock sales and get no established credit
External sources of finance
Equity of finance
- the process of raising capital through the sale of shares
share capital
- money raised from selling shares in a limited liability company
advantages- lower risk, no repayment required
disadvantage- not cost-efficient, shareholders expect higher returns
venture capital
- a form of high-risk capital, in the form of loan or shares, invested by venture capital firms, usually at the start of a business idea
advantages- can help your business grow quickly
disadvantages- your investors earn a stake in your company
business angel
- extremely wealthy individuals who choose to invest their own money in businesses that offer high growth potential - high-return business ventures.
advantages- free to make investment decisions quickly -no need for collateral
disadvantages- takes longer to find a suitable angel investor -giving up a share of your business
Debt finance
- When a business takes out a loan that will be repaid with interest at a later time
loan capital
- medium to long term sources of finance obtained from commercial lenders
advantages- common tool for expansion -no shares in the business -lower interest rates
disadvantages- limited flexibility -assets may be taken
overdrafts
- a financial service that allows a business to temporarily overdraw on its bank account
advantages- you only borrow what you need at the time which may make it cheaper than a loan -it's quick to arrange
disadvantages- If you have to extend your overdraft, you usually have to pay an arrangement fee -the interest rate applied is nearly always variable, making it difficult to accurately calculate your borrowing costs
advantages- retain control (when you agree to debt financing from a lending institution, the lender has no say in how you manage your company) -easier planning (You know well in advance exactly how much principal and interest you will pay back each month)
disadvantages- qualification requirements (you need a good enough credit rating), you’ll need to have the financial discipline to make repayments on time
Financial aid
- monetary aid or help such as subsidies, tax allowances, loan guaranties, loans, bailouts, and grants
Grants
- a sum of money given by a government or other organization for a particular purpose.
advantages- free money -gain credibility
disadvantages- time-consuming -difficult to receive -they come with restrictions and conditions
Subsidies
- government funds given to producers to help increase production and consumption of a good, by reducing their production costs.
advantages- lowering prices and controlling inflation
disadvantage- potential increase in taxes
Other sources
debt factoring
- Debt factoring is when a business sells its accounts receivables to a third party at a discount
advantages- saves time and resources
disadvantages- puts businesses in temporary debt
trade credit
- source of finance that allows a business to postpone payments, or to 'buy now and pay later.'
advantages- help start-up businesses get up and running -no cash required up front
disadvantages- penalties and interest -legal action if you fall behind on trade credit payments
leasing
- form of hiring whereby a contract is agreed between a leasing company and the customer
advantages- tax benefits -low capital expenditure
disadvantages- lease expenses -limited financial benefits -debt