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Internal & External Sources of Finance - Coggle Diagram

- - - - Advantages
        
        It is a permanent source of capital
        
        There are no interest payments, relieves the business from additional expenses
      - Disadvantages
        
        Shareholders expect to be paid dividends when the business makes a profit
        
        For Public limited companies, loss of ownership
    - - Advantages
        
        Accessible and can be arranged quickly
        
        Repayment is spread out over time, reducing purden of having to pay full sum in a time period
        
        Large organizations can negotiate for lower interest charges depending on amount
        
        Owners still have full control of the business if no shares are being issued
      - Disadvantages
        
        Capital will have to be redeemed even if business is making a loss
        
        Collateral might be required before loans
        
        Failure to repay loan can lead to loss in firm's assets
    - - Advantages
        
        Provides opportunity for firms to spend more money than they have in their account, helps settle short-term debts
        
        Flexible form of finance as demand will depend on the needs of a business in a particular point in time
        
        Charging interest only on amount overdrawn, cheaper option than loan
      - Disadvantages
        
        Banks can request for the overdraft to be paid back at very short notice
        
        Bank can charge high interest rates
    - - Advantages
        
        By delaying, businesses are left with better cash flow position than if they paid immediatley
        
        Interest-free
      - Disadvantages
        
        Debtors lose possibility of getting discounts if they purchased by paying cash
        
        Delaying payment after agreed period can lead to poor relation
    - - Advantages
        
        Provides access to thousands of investors
        
        Valuable form of marketing through social media.
        
        Allows for feedback and expert guidance (Market Research)
        
        Business still maintains full control, wont have to forfeit control
      - Disadvantages
        
        Strong competition. Numerous projects and competitors seeking the same thing
        
        Can be put under scrutiny and rejection if people dislike the idea
        
        Online platforms usually take a percentage of fee
        
        Potential risk of failure if campaign fails, can be hard to recover from
    - - Advantages
        
        Firm doesn't need high initial capital to purchase asset
        
        Lessor takes responsability of repair and maintenance of asset
        
        Leasing is useful when particular assets required periodically
      - Disadvantages
        
        Leasing can be more expensive than purchasing asset due to accumulated costs
        
        Leased asset cannot be collateral for a business
    - - Advantages
        
        Do not seek collateral for providing financial credit
        
        They provide quick loans with less formalities for emergencies
        
        Promote self-sufficiency
        
        Extensive loans for housing loans etc
      - Disadvantages
        
        Can adopt harsh recovery methods if customers doesnt have legal representation
        
        Interst rates on loans are high
        
        They offer smaller loans than other financial institutions that provide a larger amount
    - - Advantages
        
        Open to negotiation
        
        No repayment needed or interests
        
        Offer valuable knowledge and insight because of their experience
      - Disadvantages
        
        Can assume large degree of control or ownership over the business they invest in
        
        Can expect a large return on investment within first few years
- - - - Personal funds (for sole traders)
        
        Do not need to be repaid. No interest charged. Furthermore by investing their personal funds, if required sole traders and partners have a greater chance of being granted loans because they have shown greater commitment to the business venture
      - Retained profit
        
        Does not incur interest charges. Permanent source because it does not need to be repaid. if a project fails the use of retained profit doesn't put the business in debt. in addition it can be used for any purpose unlike bank loans which are granted for specific uses only
      - Sale of assets An asset is anything that a business owns and has a marketable value, such as buildings, vehicles, computers, equipment. Non-current assets are items a business owns and uses for more than 12 months, can be reused again and again, and also generates income for the organization. When a business is in need of cash, it can sell off some of its non-current assets. Many businesses dispose of their old or obsolete assets.
        
        Large sum of money can be raised. no interest chargers. Sale of excess resources is sensible way for a business to raise finance. Otherwise these resources would tie up much needed working capital for the organization
    - - Personal Funds (for Sole Traders) Personal funds are mainly from savings
        
        As sole traders represent a high risk, they are less likely to secure external sources of finance, and in result would have to rely on their personal funds.
        
        Personal funds are rarely sufficient for most small businesses and can be quite limited.
        
        Many entrepreneurs risk their entire savings in a business. Specifically, sole traders and partners risk losing all their funds if the business fails or doesn't perform to the required level (due to unlimited liability).
      - Retained Profit It is an internal source of finance that comes from having a financial surplus. These funds are reinvested in the business, rather than being distributed to the owners (shareholders).
        
        Retained profit is rarely enough as a sole source of finance for most businesses in their goal and ambition of growth and expansions.
        
        Start-up business don’t have any retained profit, so this is not a possible source of finance for creating a new business.
        
        Using the funds as retained profits for use to grow the business means there is less amounts paid out to shareholders and owners of the business reducing profits.
      - Sale of Assets An asset is anything that a business owns and has a marketable value, such as buildings, vehicles, computers, equipment. Non-current assets are items a business owns and uses for more than 12 months, can be reused again and again, and also generates income for the organization. When a business is in need of cash, it can sell off some of its non-current assets. Many businesses dispose of their old or obsolete assets.
        
        The sale of certain non-current assets can impact a business' productive capability. For example, a struggling company which sells some of its computer equipment or machinery, which could be needed for production.
        
        It can be very time consuming to find a suitable buyer for second-hand assets, especially if these are outdated. Even if a buyer can be found, the purchase price is likely to be very low especially if the business is in need of cash.
        
        The option of asset sales is only available to established businesses; new businesses are unlikely to be in such a position because of a lack of resources and equipment to sell.