Theme 2
Internal and external finance
Circumstances of businesses needing finance: starting up, growing,
dealing with cash flow problem, financing extra materials needed when
large order is received
Internal sources
Owners capital: personal savings. Most likely to be used as start-up
source. Redundancy payment often used too. Money provided in form
of share capital or lent to business as loan.
Retained profit: when all costs have been covered and dividends paid,
profits left over can be used. Safest and most common form. Must have
profit and not spent it on anything else. Not for start-ups.
Sale of assets: for when established businesses are changing strategy.
Cash generated by assets sales as no longer needed.
External sources
Family and friends: provide extra start-up capital necessary for start-
ups. May be by taking an equity stake in a business set up as limited
company. Provide loans where banks are unwilling. Limited to start ups
and small businesses.
Banks: loans to start ups aren’t common as risky proposition. With a
loan banks will insist on some collateral as security (business/personal
asset). Most widely applicable finance source, but hard to get help from
banks at reasonable interest rates.
Peer-to-peer funding: recent development, relies on websites that
match investors willing to lend to business start-ups needed finance.
High interest rates but option when banks won’t lend. Rare, most likely
for risky start up.
Business angels: rich individuals who provide capital to high risk small
ventures or start-ups. e.g. dragon’s den. Become involved in strategic
management in hope of high returns. Rare, likely for start-ups or
recently started business that offers high rewards
Crowdfunding: allows small investors to find business start-ups online
where they’re willing to invest though crowdfunding websites. Not one
big investor but many small. Limited to start ups rather than
established businesses.
Other businesses: large firms seeking out small businesses. Return is
taking a shareholding. Occurs in tech-based industries with large firms
looking to find and cash in on the next big thing. Rare as only few will
offer.
Methods of finance
Internal and external finance
Circumstances of businesses needing finance: starting up, growing,
dealing with cash flow problem, financing extra materials needed when
large order is received
Internal sources
Owners capital: personal savings. Most likely to be used as start-up
source. Redundancy payment often used too. Money provided in form
of share capital or lent to business as loan.
Retained profit: when all costs have been covered and dividends paid,
profits left over can be used. Safest and most common form. Must have
profit and not spent it on anything else. Not for start-ups.
Sale of assets: for when established businesses are changing strategy.
Cash generated by assets sales as no longer needed.
External sources
Family and friends: provide extra start-up capital necessary for start-
ups. May be by taking an equity stake in a business set up as limited
company. Provide loans where banks are unwilling. Limited to start ups
and small businesses.
Banks: loans to start ups aren’t common as risky proposition. With a
loan banks will insist on some collateral as security (business/personal
asset). Most widely applicable finance source, but hard to get help from
banks at reasonable interest rates.
Peer-to-peer funding: recent development, relies on websites that
match investors willing to lend to business start-ups needed finance.
High interest rates but option when banks won’t lend. Rare, most likely
for risky start up.
Business angels: rich individuals who provide capital to high risk small
ventures or start-ups. e.g. dragon’s den. Become involved in strategic
management in hope of high returns. Rare, likely for start-ups or
recently started business that offers high rewards
Crowdfunding: allows small investors to find business start-ups online
where they’re willing to invest though crowdfunding websites. Not one
big investor but many small. Limited to start ups rather than
established businesses.
Other businesses: large firms seeking out small businesses. Return is
taking a shareholding. Occurs in tech-based industries with large firms
looking to find and cash in on the next big thing. Rare as only few will
offer.
Methods of finance
