Describes the advantages and disadvantages of internal and external sources of finance and business plans, as well as explaining the difference between unlimited and limited liability
Theme 2 Topic 7
Internal & External Finance
Internal Finance
Internal Finance – finance raised from within the business itself
Owner’s Capital (Personal Savings) – money that is provided by the owner of the business from their own
savings or personal wealth
Advantages Disadvantages
Cheap sources of finance as you don’t have Not a sustainable source of money
to pay interest or share the profits Won’t get it back if the business fails – risk
Allows the owner to keep full control of losing everything
May be the only option possible Might not be enough
Start-up debt
Retained Profit – profit that is reinvested in the business rather than distributed to the shareholders or owners
Advantages Disadvantages
Don’t need to pay interest Low dividends may dissatisfy the
Can lead to higher profit shareholders
No debt Once used, can’t be used elsewhere
More control Not suitable for start-up businesses
Sale of an Asset – an asset is any item owned by the business
Advantages Disadvantages
The asset may no longer be needed by the No longer able to use it
business so is a good source of finance May need it in the future
Don’t have to pay interest Might not get enough for it to cover the
costs of the business
External Finance
External Finance – finance raised from sources outside of the business
Overdrafts – an arrangement that allows you to spend more money than you have in your bank account, up to
a certain limit, if you need it
Advantages Disadvantages
Extremely flexible and therefore good for Higher interest rates than loans – not
short-term finance suitable as a long-term source of finance
Quick and easy to arrange The bank can ask for repayment at any time
Interest is only paid on the amount of the (although this is rare)
overdraft being used rather than the
maximum level allowed
Security e.g. collateral is not usually
required
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