Unit 2
P4: Describe Sources of Internal and External Finance for a
selected Business
Businesses can gain sources of fnance in two ways, internally and externally. For this task I will be assessing
how businesses use internal and external sources of fnance for a selected organisaton, and also assess which
are suitable or not for my business from both internal and external.
Internal sources of fnance
Internal means ‘within’, and for the fnance of a business it means fnancial processes that take place within a
business. There are not many internal sources of fnance but only the assets from the owner and capital form
the profts of the business.
Savings Capital
Many businesses start of from their own money that The capital is another internal sources of fnance as
they have earned and saved. This money can be this is the money that is made from profts. This
used to place the business or for other things like money can be used for the business in any way. For
furniture and decoraton for the store. Many sole example, if the owner saves the money made from
traders that want to get money from a bank can be profts, he/she can use that capital to open another
rejected, so then the money that have saved up can store. It can be used for anything, even to repay
be used instead. loans.
Both savings and capital have advantages and disadvantages.
Advantages Disadvantages
Savings The sole trader in in complete control of If the money is used for a business, and then it fails,
what happens to the money. the money was not worth saving.
The money has no interests added to it.
Capital The owner makes all the decisions on May not make enough proft to run business.
what happens with the proft.
Suitable or not?
For my business, I can use my savings and proft that will make from the business. The savings and proft can
be used for many things like stock and also can be used for bills and other types of payments. This is a good
source of fnance as it has no extra cost to it when using but I can lose it if my business does not succeed. I can
also create a saving whilst the business is running as if I have any extra money lef afer spending for the
business. I can use my businesses savings if there are any situaton or I can save up enough to expand my
business. This is useful as I can have a backup amount of money for any cases. An example of when I can use
my savings is in the beginning for startng up my business and paying any fees at the site rather than having to
go to the bank. An example of when I can use the proft I make for buying stock or to pay rent.
External Sources of Finance
External means ‘outside’, so for a business it means fnancial processes that takes place outside of the
business. In all cases, most businesses use external sources of fnance. This would for many reasons such as
not having enough money to start in the beginning or getng a grant.
Useful for my business? What is it? Advantages Disadvantages
Bank Loans – for my business A set amount of money Can be paid payed over a Getng the loans may be
I can get a loan, as it is that is borrowed by an long or short period of denied by the bank as
available for anyone, but I individual or group tme. So does not have to they don’t see your
will need to give a strong (business) that can be paid instantly. business as a strong one.
presentaton about my repaid over a set period of
business to access this loan. tme. During the payment,
small instalments of
interest will be added by
the bank.
Overdrafs – for my business I Another version of a loan, It’s a much cheaper version Can only be taken for a
can also gain access to this, but has to be paid back in a of a loan. short tme. Bank may
1
P4: Describe Sources of Internal and External Finance for a
selected Business
Businesses can gain sources of fnance in two ways, internally and externally. For this task I will be assessing
how businesses use internal and external sources of fnance for a selected organisaton, and also assess which
are suitable or not for my business from both internal and external.
Internal sources of fnance
Internal means ‘within’, and for the fnance of a business it means fnancial processes that take place within a
business. There are not many internal sources of fnance but only the assets from the owner and capital form
the profts of the business.
Savings Capital
Many businesses start of from their own money that The capital is another internal sources of fnance as
they have earned and saved. This money can be this is the money that is made from profts. This
used to place the business or for other things like money can be used for the business in any way. For
furniture and decoraton for the store. Many sole example, if the owner saves the money made from
traders that want to get money from a bank can be profts, he/she can use that capital to open another
rejected, so then the money that have saved up can store. It can be used for anything, even to repay
be used instead. loans.
Both savings and capital have advantages and disadvantages.
Advantages Disadvantages
Savings The sole trader in in complete control of If the money is used for a business, and then it fails,
what happens to the money. the money was not worth saving.
The money has no interests added to it.
Capital The owner makes all the decisions on May not make enough proft to run business.
what happens with the proft.
Suitable or not?
For my business, I can use my savings and proft that will make from the business. The savings and proft can
be used for many things like stock and also can be used for bills and other types of payments. This is a good
source of fnance as it has no extra cost to it when using but I can lose it if my business does not succeed. I can
also create a saving whilst the business is running as if I have any extra money lef afer spending for the
business. I can use my businesses savings if there are any situaton or I can save up enough to expand my
business. This is useful as I can have a backup amount of money for any cases. An example of when I can use
my savings is in the beginning for startng up my business and paying any fees at the site rather than having to
go to the bank. An example of when I can use the proft I make for buying stock or to pay rent.
External Sources of Finance
External means ‘outside’, so for a business it means fnancial processes that takes place outside of the
business. In all cases, most businesses use external sources of fnance. This would for many reasons such as
not having enough money to start in the beginning or getng a grant.
Useful for my business? What is it? Advantages Disadvantages
Bank Loans – for my business A set amount of money Can be paid payed over a Getng the loans may be
I can get a loan, as it is that is borrowed by an long or short period of denied by the bank as
available for anyone, but I individual or group tme. So does not have to they don’t see your
will need to give a strong (business) that can be paid instantly. business as a strong one.
presentaton about my repaid over a set period of
business to access this loan. tme. During the payment,
small instalments of
interest will be added by
the bank.
Overdrafs – for my business I Another version of a loan, It’s a much cheaper version Can only be taken for a
can also gain access to this, but has to be paid back in a of a loan. short tme. Bank may
1
