P4-describe sources of internal and external finance for a selected business
In this assignment I will be looking at internal and external sources of finance for a selected business.
I will be looking at 5 sources of finance for internal and external and also I will be looking at 2
advantages and 2 disadvantages for each source of finance.
Internal
Source of finance Advantages Disadvantages
Personal savings One advantage is that you get to spend it on The disadvantage of personal saving is that it
(internal) whatever you want in the business. It doesn’t takes time to save up money.
have to be for a specific purpose, because it's
Personal savings is a saving. Another disadvantage is that you can get
the money you tempted to spend your savings. This means
have saved up. Another advantage is that savings can be that your savings can be spent on somewhere
unlimited, so the more you save, the more else rather than investing the money into the
you have to spend on the business. Also there business.
is no interest.
Retained profits If a company were to borrow loans, a large It may so happen that the retained profit is
(internal) amount of money would have to be paid as misused by the company management. They
interest adding to the company’s expenses. may not use the money cautiously or they may
Profits generated
But by retaining profit, the companies can use even misappropriate it. They may use the
by a company that
its own money and there is no question of retained profit outside the business whereas, it
are not distributed
to stockholders payment of interest. The company thus saves should have been used inside the business to
(shareholders) as on this expenditure. help the business expand.
dividends but are
either reinvested in When a company borrows funds, say from a By retaining the profit with the business, the
the business or bank, it will have to provide some kind of company is actually depriving the shareholders
kept as a reserve security. In case of large loans, it may have to from the money actually due to them.
for specific mortgage its property even. But for a
objectives (such as company with retained profit, mortgaging is
to pay off a debt or
unnecessary as it has its own funds to dip into.
purchase a capital
asset)
Loans (external) One advantage of getting a loan is that you One disadvantage is that people sometimes
can get the wanted amount you want from over borrow money and get caught in their own
Written or oral the bank or building societies. It also gives you debt. Often, this can lead to a shortfall in cash
agreement for a the opportunity to expand your business, flow and payments can take priority over
temporary transfer invest in something, or simply to give you income. To prevent this, loan repayments are
of a property funds for the items that you need. restricted to a set percentage of a borrower’s
(usually cash) from income.
its owner (the Another advantage is speed, if the borrower
lender) to a has all the appropriate documentation, any Another disadvantage is that often, loans come
borrower who bank can process his application within an with a prepayment penalty which prevents the
promises to return hour borrower from paying the loan earlier than the
it according to the stipulated date without incurring any extra
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