Sources of finance

Overview

Internal and external finance, retained profit, selling assets, family and friends, share issues, bank loans, mortgages, overdrafts, trade credit, hire purchase and grants, and matching finance to the business.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   Why do businesses need finance?

   Model answer

   Businesses need finance to start up, to pay day-to-day costs and to grow. Finance may also be needed to survive a period of poor cash flow.

2. 2

   What is the difference between internal and external sources of finance?

   Model answer

   Internal finance comes from within the business, such as retained profit or selling assets. External finance comes from outside, such as loans, share issues and grants.

3. 3

   What is retained profit?

   Model answer

   Retained profit is profit kept in the business rather than paid out to its owners. Retained profit is cheap, as no interest is paid, but a new business has none.

4. 4

   How can selling unwanted assets raise finance?

   Model answer

   A business can sell equipment, vehicles or property it no longer needs. The sale raises cash without borrowing, but each asset can only be sold once.

5. 5

   What are the benefits and drawbacks of finance from family and friends?

   Model answer

   Family and friends may lend money cheaply and be flexible about repayment. A disagreement over the money can damage personal relationships.

6. 6

   What is a new share issue?

   Model answer

   A new share issue is the sale of additional shares in a company to raise finance. Only limited companies can issue shares.

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