P4 Unit 2
Identify a range of internal and external sources of finance for a selected business.
The business I have selected for this section is Domestic Dog Homes which is a private sector
business. This business requires capital in order to cover all costs and keep it running, it is a
profitable business and aims to earn a profit.
There are three main reasons why businesses need finance:
To start up a business, for e.g. pay for a premises and purchase new required equipment.
They may also need to advertise their business
To run a business, this may be because they have to cover running costs as well as
wages/suppliers on time.
To expand the business, huge amount of funds will be needed by businesses in order to
expand the branch to a different city or country.
Internal Sources of finance are funds which are found within the organisation or individual. There
are several types of internal sources of finance which will be explored later, extra sources of finance
may be wanted by an organisation in order to carry out plans, for e.g. to expand – capital may be
needed in order to expand the range of products provided. Other businesses may need a source of
finance in order to cover costs as they are not producing enough revenue to break even.
The owners of Domestic Dog Homes are likely to have personal savings. Personal savings are the
backbone of many businesses, it is preferred to external sources of finance such as loans as no
repayments have to be made and it is a much safer option. However, if organisations or individuals
use their personal savings, they would be less secure as if an urgent repair is required, they would
have no emergency money for the repair. Domestic Dog Homes can use their personal savings to
expand their range of products provided. This source of finance will always be available to Domestic
Dog Homes until the owners no longer have savings. The owners can access this source of finance at
any time, it is also the quickest source of finance any business can attain.
Another internal source of finance businesses can use is capital from their profits. Once a business
begins to make a profit, it can be reinvested into the business depending if the owner wants to. By
investing profits back into the business, it allows it to grow on a slow regular basis. Domestic Dog
Homes generate their revenue by selling pet beddings for dogs in a range of sizes. Domestic Dog
Homes will only be able to use profits if they are producing a profit, therefore this source of finance
is not secure or reliable. Other business owners may keep profits for personal use, this would not be
useful to the business as it is being prevented from growing. An advantage of using capital from
profits is that owners do not have to repay anyone.
External sources of finance are sources that come from outside of the business and eventually
involve the business owing money to outside individuals (entrepreneurs) or institutions (banks).
Businesses such as Domestic Dog Homes can apply for bank loans – this is borrowing money at an
agreed rate of interest over a set period of time. It is considered a medium or long term of finance.
Domestic Dog Homes would need huge capital in order to expand as they need money to purchase
stock from ‘leading designers’, therefore they can take out a huge bank loan in order to cover costs.
They must go through a specific procedure in order to receive a bank loan. Domestic Dog Homes will
have set repayments which are spread over a period of time which is good for budgeting. However it
could be expensive for the business as overall costs will increase and it could bring them into
negative cash flow. Some banks may require security on loans in case businesses cannot repay loans.
Identify a range of internal and external sources of finance for a selected business.
The business I have selected for this section is Domestic Dog Homes which is a private sector
business. This business requires capital in order to cover all costs and keep it running, it is a
profitable business and aims to earn a profit.
There are three main reasons why businesses need finance:
To start up a business, for e.g. pay for a premises and purchase new required equipment.
They may also need to advertise their business
To run a business, this may be because they have to cover running costs as well as
wages/suppliers on time.
To expand the business, huge amount of funds will be needed by businesses in order to
expand the branch to a different city or country.
Internal Sources of finance are funds which are found within the organisation or individual. There
are several types of internal sources of finance which will be explored later, extra sources of finance
may be wanted by an organisation in order to carry out plans, for e.g. to expand – capital may be
needed in order to expand the range of products provided. Other businesses may need a source of
finance in order to cover costs as they are not producing enough revenue to break even.
The owners of Domestic Dog Homes are likely to have personal savings. Personal savings are the
backbone of many businesses, it is preferred to external sources of finance such as loans as no
repayments have to be made and it is a much safer option. However, if organisations or individuals
use their personal savings, they would be less secure as if an urgent repair is required, they would
have no emergency money for the repair. Domestic Dog Homes can use their personal savings to
expand their range of products provided. This source of finance will always be available to Domestic
Dog Homes until the owners no longer have savings. The owners can access this source of finance at
any time, it is also the quickest source of finance any business can attain.
Another internal source of finance businesses can use is capital from their profits. Once a business
begins to make a profit, it can be reinvested into the business depending if the owner wants to. By
investing profits back into the business, it allows it to grow on a slow regular basis. Domestic Dog
Homes generate their revenue by selling pet beddings for dogs in a range of sizes. Domestic Dog
Homes will only be able to use profits if they are producing a profit, therefore this source of finance
is not secure or reliable. Other business owners may keep profits for personal use, this would not be
useful to the business as it is being prevented from growing. An advantage of using capital from
profits is that owners do not have to repay anyone.
External sources of finance are sources that come from outside of the business and eventually
involve the business owing money to outside individuals (entrepreneurs) or institutions (banks).
Businesses such as Domestic Dog Homes can apply for bank loans – this is borrowing money at an
agreed rate of interest over a set period of time. It is considered a medium or long term of finance.
Domestic Dog Homes would need huge capital in order to expand as they need money to purchase
stock from ‘leading designers’, therefore they can take out a huge bank loan in order to cover costs.
They must go through a specific procedure in order to receive a bank loan. Domestic Dog Homes will
have set repayments which are spread over a period of time which is good for budgeting. However it
could be expensive for the business as overall costs will increase and it could bring them into
negative cash flow. Some banks may require security on loans in case businesses cannot repay loans.
