Internal Sources of finance
Personal savings – Placing the owner’s available savings into the business. This type
of finance would be ideal for RD carpets as no money needs to be paid back to a
certain individual considering that the money is the owners himself.
Retained profit – The profit already made that has been set aside to reinvest in the
business. It can be used for advertising and marketing or a new type of material for
carpets. The advantages of retained profit are that it is flexible and allows RD carpets
to maintain full control of the business rather than complicating things through
creditors. The issue with retained profit is that RD carpets would be risking missing
business opportunities as there would be too much concentration on building up the
necessary funds.
Working capital – This is the short-term money reserved for expenses in each day
such as salaries, rent, bills and invoice payments. This would be essential for RD
carpets to use only when the business is in risk of losing a substantial amount of profit
and require money in order to restructure the business.
Sales of assets – There could be extra fixed assets such as the machinery that could be
sold in order to produce money for other areas in the business. Selling items that are
still being used by the business should be decided carefully as it could affect the
performance of the business as production would be slowed down. RD carpets should
avoid selling important assets overall as it would only cause a loss of profit.
External Sources of finance
Overdraft – A bank overdraft could be a good source of short-term finance that can
help a business such as RD carpets help with problems with cash-flow. An overdraft
is cheaper than a loan which is a plus.
Loans – These come with fixed or variable interest which are typically held against
the asset being invested in thus the loan company will have a legal mutual interest in
the investment. This means that the company would not be able to sell the asset
without the lender’s agreement. Moreover, the lender will take precedence over the
owners and shareholders if the business was to fail. A loan would not be ideal for RD
carpets as it would mean that they would have to work harder in earning higher profits
so that they can pay the loan off. This would make the business come under pressure.
Credits from suppliers – Most invoices have payment terms of 30 days or longer. A
business can take the maximum amount of time to pay and use the money in the
meantime to make an investment into other things. However, the invoice must be paid
back on time otherwise a business can risk endangering a relationship with the
suppliers. Credit from suppliers could be a good thing for RD carpets as it could
possibly induce more sales over time by allowing customers to make purchases
without immediate cash. This flexibility in purchasing can also encourage customers
to make larger purchases. Credit from suppliers could also be a bad thing for RD
carpets as it is a risky debt; if the debt isn’t paid off in a timely manner; it could have
negative effects on the supplier.
Page 1 of 7
Personal savings – Placing the owner’s available savings into the business. This type
of finance would be ideal for RD carpets as no money needs to be paid back to a
certain individual considering that the money is the owners himself.
Retained profit – The profit already made that has been set aside to reinvest in the
business. It can be used for advertising and marketing or a new type of material for
carpets. The advantages of retained profit are that it is flexible and allows RD carpets
to maintain full control of the business rather than complicating things through
creditors. The issue with retained profit is that RD carpets would be risking missing
business opportunities as there would be too much concentration on building up the
necessary funds.
Working capital – This is the short-term money reserved for expenses in each day
such as salaries, rent, bills and invoice payments. This would be essential for RD
carpets to use only when the business is in risk of losing a substantial amount of profit
and require money in order to restructure the business.
Sales of assets – There could be extra fixed assets such as the machinery that could be
sold in order to produce money for other areas in the business. Selling items that are
still being used by the business should be decided carefully as it could affect the
performance of the business as production would be slowed down. RD carpets should
avoid selling important assets overall as it would only cause a loss of profit.
External Sources of finance
Overdraft – A bank overdraft could be a good source of short-term finance that can
help a business such as RD carpets help with problems with cash-flow. An overdraft
is cheaper than a loan which is a plus.
Loans – These come with fixed or variable interest which are typically held against
the asset being invested in thus the loan company will have a legal mutual interest in
the investment. This means that the company would not be able to sell the asset
without the lender’s agreement. Moreover, the lender will take precedence over the
owners and shareholders if the business was to fail. A loan would not be ideal for RD
carpets as it would mean that they would have to work harder in earning higher profits
so that they can pay the loan off. This would make the business come under pressure.
Credits from suppliers – Most invoices have payment terms of 30 days or longer. A
business can take the maximum amount of time to pay and use the money in the
meantime to make an investment into other things. However, the invoice must be paid
back on time otherwise a business can risk endangering a relationship with the
suppliers. Credit from suppliers could be a good thing for RD carpets as it could
possibly induce more sales over time by allowing customers to make purchases
without immediate cash. This flexibility in purchasing can also encourage customers
to make larger purchases. Credit from suppliers could also be a bad thing for RD
carpets as it is a risky debt; if the debt isn’t paid off in a timely manner; it could have
negative effects on the supplier.
Page 1 of 7
