Essay
Unit 2 P4 - Describe sources of internal and external finance for a selected business
- Module
- Unit 2 - Business Resources
- Institution
- Pearson (PEARSON)
P4 – Describe sources of internal and external finance for a selected business.
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Unit 2 Business ResourcesPass Criteria 4
P4 – Describe sources of internal and external finance for a selected business.
Internal sources of finance
The founder of Tesco used his own personal savings (owner’s savings) to start up business,
he used the money to pay for war-surplus groceries which was what the business started
out selling, he also used his own money to pay for the market stall that he used to sell the
goods he bought. The founder then used profits (capital from profits) of the business to
expand the company which means that the profits would increase as they would be selling
more stock because they had more variety and were in different areas which made it
accessible to more people, in 2014 Tesco cut its capital spending to no more than £2.5
billion as they must of figured how much they could use without using too much as they
need some money in case the business gets into financial difficulty.
External sources of finance
Tesco now is a very large company so not all forms of external finance don’t apply to them,
such as money from banks, building societies, government grants and money from friends
and family. Tesco could’ve got money from banks in the form of a business loan or the use
of an overdraft facility on the business account, an overdraft facility means that you can
withdraw money from your account up to a point without having money in it, this would be
set when the account is set up and is called an overdraft limit. Building societies work in the
same way as a bank the only difference is the way they are owned and where the money
comes from. Government grants are available from the EU, national government and local
government, the money that is granted to a person does not have to be paid back. The
founder of Tesco could’ve used money from friends and family to start up the business as he
may not have had enough money in his own personal savings.
Tesco could get commercial mortgages for the buildings they use, this means that the
business doesn’t have to pay upfront for the price of the buildings, instead they get a long-
term loan of the money required to buy the building which they will then pay back over
time. Tesco does not own all the buildings that it operates in, instead of getting a
commercial mortgage which costs money in interest, some of the buildings are leased, this
means that Tesco doesn’t own the building, they instead pay money to the owner of
building to use the site, Tesco also sells the stores they own for people to buy and rent back
to them.
Tesco may use venture capitalists to invest in new plans/schemes that could take the
business to a new level, venture capitalists are used if the company thinks that the new
plans are too risky for the business itself to invest in, so they get an outside source to invest
in the plan, the venture capitalist usually gets a share of the ownership of the new
scheme/plan.
If schemes that have put in place by Tesco, that the company itself has invested in, do not
work out as the return is less than expected Tesco may end up in debt, they can then sell
this debt to a factor.
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