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External and Internal sources of finance - Coggle Diagram
External and Internal sources of finance
External
Bank loans
This are usually repaid on a monthly basis and also they charge interests on the loan amount.
Disadvantage: They can be expensive some times.
Advantage: Quickly and easy to arrange.
Sale and leaseback
They may sell an asset and then leases it back from its new owner.
Disadvantage: The leasing arrangement may not include maintenance.
Advantage: The firm retains use of the asset.
Hire purchase
Is like leasing but when the monthly payments are complete, they own the asset.
Disadvantage: Usually the firm has to be in charge of maintenance.
Advantage: The firm owns the asset when all the payment is complete.
Leasing
The business hire an asset instead of purchasing it so reduces the amount of finance.
Disadvantage: the cost of leasing is higher than the purchasing asset.
Advantage: The firm can replace the asset.
Venture capital
They invest in young businesses risking and also doesn't ask for security.
Disadvantage: Firms share ownerships and profit with the capitalists.
Advantage: Usually offer management advice.
Debt factoring
Companies sell a debt by giving a percentage of the debt and then would recover all by themselves
Disadvantage: The firm may not receive 100% of the debt.
Advantage: Provide the business quick access to funds.
Debentures
They have fixed interest rates and repayable.
Disadvantage: Only available to large limited companies.
Advantage: Interest may be cheaper than bank loans.
Trade credit
A business normally does not pay complete all the purchase, they pay within 30 or 90 days
Disadvantage: Has to be managed for avoiding overtrading or cash flow crisis.
Advantage: Is interest-free and easily available.
Grants
Government offer grants for businesses setting up in certain locations or also for creating employment opportunities.
Disadvantage: Only available for some businesses and countries.
Advantage: Provide cheap or free source of funds.
Overdrafts
Is like a short term bank loan, it allows that a business takes more money than what they had deposited.
Advantage: Cheaper than a bank loan
Disadvantage:The banks charge high interest rates and fees.
Internal
Retained profit
The business use the profit as a source of finance and avoids the cost.
Advantage: Provides an interest-free source of funds.
Disadvantage: The owners receive less rewards because of their risks.
Working capital
Is the money available for daily operations.
Advantage: The management of cash is good for the business.
Disadvantage: Money may not be available always.
Owners' funds
Sole trader or partner that put more of their own money into the business.
Advantage: Provides a quick, interest free source of funds.
Disadvantage: The owners can afford considerable risks.
Sale of assets:
A firm can send its vehicles or buildings to have funds.
Advantage: Enable a. business to release a big sum of money.
Disadvantage: The firm loses the use of the asset.