Business Theme 2 Flashcard
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Internal finance: capital that is raised from within the firm operation, e.g. includes:
Retained profit: money that has been generated from the ongoing operation of the
firm, the profit earned is reinvested into the business to further achieve business growth.
+ quick, easy and convenient compared to external sources of finance such as the
bank loan where a thorough business plan is required which can be time-consuming
+ No need to pay the interest rate or share a proportion of the profit to investors
compared to share capital, venture capital or bank loan
+ allows flexibility, can utilise the retained profit at any time
- the money may not be used later on when it’s crucially needed, unable to get the
capital instantly when working capital is low in future, inefficient firm operation, business
failure
- unlimited liability, in the case of business failure, the owner is responsible fo all the
debt, increasingly risky, assets may be at risk if the collateral is being used.
- can be a small amount or start-up businesses may not have any retained profit, so
other sources of finance may be more suitable in order to support the firm operation.
Owner’s capital: personal savings, money that has been raised by the owner of the
firm which may have come from income savings of a previous job or any other revenue
streams that the owner may have.
+ allows flexibility, can be used at any time without the requirement of long
documentation procedures such as the bank loan, cost-effective
+ less pressure on the firm compared to share capital which is always concerned with
shareholder pressure
- unlimited liability
- may not be enough to super the firm operation, other sources of finance may be
better
Business Theme 2 Flashcard 1
, Sale of assets: raising finance by the means of selling firms assets such as land,
machinery or any physical goods that can be traded for the money
+ Quick, easy and convenient compared to external sources of finance such as bank
loans
+ can be used as collateral to secure better loan deals
+ No loss of ownership or interest to be paid, no pressure on the firm
- business may not get the actual value of the asset if sold during low market prices,
can be a great loss, unable to get the true value of the assets, reduced capital gain
- selling assets may be unattractive to investors as the asset will be removed from the
balance sheet, and external investment may be limited
- start-up businesses may not have any assets in the beginning, not suitable for raising
finance
External finance: money that has been raised from outside the operation of the firm,
usually a greater amount of capital is raised by an external source of finance compared
to internal.
Family and friends: getting money from a member of the family or a friend to support
the firm operations
+ may not charge interest rates, can be cheap
+ there may be little or no pressure to pay back the money borrowed, which allows one
to focus better on firm operation, strategic decision-making, business success
- tension is created if money isn't paid on time, and arguments may have an adverse
impact on the firm operation
Peer-to-peer funding: raising finance by avoiding the traditional sources of finance
such as from banks to secure capital
+ Debt factoring allows the firm to get the inflows as soon as possible, use the capital
instantly and whenever needed
Business Theme 2 Flashcard 2
, + Support the buying of physical goods through a leasing agreement, make the best
use of it
+ can be quicker and easier to obtain the unsecured loans cremated to a bank (time-
consuming)
- high-interest rates, costly compared to bank loans
- limited amount available, not sufficient to support the operation
- may seem unattractive to prospective investors as borrowing is done without any legal
work being done such as compared to bank loans
Business angels/venture capital: raising finance from experts who have an interest in
the business ideas, e.g. from dragons’ dens
+ Get knowledge and assistance with the decision-making with such valuable
resources being shared too which may be related to marketing, better financial
management or better resource allocation in the firm operation, make strategic
decisions
+ reduce risk of business failure as constant guidance and support are provided all the
time, make strategic decisions, reduced risk of business failure
- a certain amount of profit needs to be shared, reduced profitability, unable to achieve
business expansion
- loss of ownership, the investors may have a certain stake in the firm which may mean
the owner of the firm may not be the only person to make decisions, delayed decisions
as disagreement may occur
Crowdfunding: securing funds through setting up a business profile in an associated
platform that allows raising capital from multiple people who are interested
+ Quick, easy and convenient
+ Most likely the payment does not need to be paid back, less pressure on the firm to
return the money
- not suitable for raising large sums of money as it can be time-consuming
- may build a negative reputation if investors’ promises and wants aren't met, negative
word of mouth, harm reputation, loss of consumers and prospective investors, limits
Business Theme 2 Flashcard 3
