Summary Internal & External Finance

Theme 2 Topic 7
Internal & External Finance
Internal Finance
Internal Finance – finance raised from within the business itself

Owner’s Capital (Personal Savings) – money that is provided by the owner of the business from their own
savings or personal wealth

Advantages Disadvantages
 Cheap sources of finance as you don’t have  Not a sustainable source of money
to pay interest or share the profits  Won’t get it back if the business fails – risk
 Allows the owner to keep full control of losing everything
 May be the only option possible  Might not be enough
 Start-up debt

Retained Profit – profit that is reinvested in the business rather than distributed to the shareholders or owners

Advantages Disadvantages
 Don’t need to pay interest  Low dividends may dissatisfy the
 Can lead to higher profit shareholders
 No debt  Once used, can’t be used elsewhere
 More control  Not suitable for start-up businesses

Sale of an Asset – an asset is any item owned by the business

Advantages Disadvantages
 The asset may no longer be needed by the  No longer able to use it
business so is a good source of finance  May need it in the future
 Don’t have to pay interest  Might not get enough for it to cover the
costs of the business


External Finance
External Finance – finance raised from sources outside of the business

Overdrafts – an arrangement that allows you to spend more money than you have in your bank account, up to
a certain limit, if you need it

Advantages Disadvantages
 Extremely flexible and therefore good for  Higher interest rates than loans – not
short-term finance suitable as a long-term source of finance
 Quick and easy to arrange  The bank can ask for repayment at any time
 Interest is only paid on the amount of the (although this is rare)
overdraft being used rather than the
maximum level allowed
 Security e.g. collateral is not usually
required