2.1.1 Internal Finance

Internal Finance - from within the business e.g. retained profit

External finance - from outside the business e.g. loans

Owner's capital : Personal savings - how much the owner has invested in the business OR the proportion of the business' assets that are owned by the business owner rather than creditors.

Assets - Items owned by the business e.g.  stock is a current asset that will stay in the business for less than a year and vehicles are long term assets.

Creditors - People who the business owes money to e.g. the bank

Retained profit - Profit kept within a business from profit for the year to help finance future activities. Profit that remains after tax bills and dividends have been covered.

Sale of assets - the sale of a long term or fixed assets. (NOT CURRENT ASSETS)

ADVANTAGES OF OWNERS CAPITAL

• Do not have to repay
• No interest charges
• Owner's maintain control
• Risking own savings can be motivational
•  Do not have to go through any lengthy application procedures.

DISADVANTAGES OF OWNERS CAPITAL

• Owner's risk losing everything which can be a risk to the owners family
• May only be limited amounts available

ADVANTAGES OF RETAINED PROFIT

• No interest repayments
• Does not dilute business ownership
• Belongs to the business already
• Does not need to be repaid
• Share holders control the proportion obtained

DISADVANTAGES OF RETAINED PROFIT

• Only an option if sufficient retained profit exists within the business. NOT SUITABLE FOR NEW BUSINESSES.
• May not be enough to finance needs
• Useless for start-ups as they will not have retained profits.
• Reduces the security blanket of keeping retained profits for unforeseen circumstances or to take advantages of new opportunities.
• May cause tension amongst shareholder if by retaining profits this will reduce their profit share they receive e.g. their dividends
• Danger of hoarding cash
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Current assets - Items owned that will change in value in the short run (within in one year). E.g. Cars, stock, technology. Anything that depreciates in value.

Fixed assets / Non Current assets - will stay in the business for more than a year e.g. machinery and vehicles.

ADVANTAGES OF SALE OF ASSETS

• No interest charges
• No repayments
• May be turning an asset that you don't use that much or need into cash
• Immediate lump sum cash injection

DISADVANTAGES OF SALE OF ASSETS

• May be expensive in the long run if need to lease the asset back
• Loss of use of the asset and future value
• Is only a one off option
• Only useful if the business does not need the assets.
• Unsuitable for start ups as they are unlikely to have any.