Internal And External Sources Of FinanceI
Internal and External Sources of Finance
I will explain the different sources of finance, some of which are internal and external to the Loxford Business unit. I will state the advantages and disadvantages of each of the sources of finance. Loxford Business Unit use both internal and external sources to get money in order to run the Business Unit successfully.
Source of Finance
Definition
Internal or external
Advantages
Disadvantages
Applicable to the Loxford Business Unit
Retained Profits
An amount of money saved aside from the business earning to be used when necessary.
Internal
The money doesn’t have to be repaid and there is no interest.
Also they are flexible as management -have complete control over how the money is reinvested and what portion is kept rather than paid as dividends.
The disadvantages are:
There will unhappy shareholders as they will receive lower dividends.
Also retained profit is not available for new business as they main aim will be to survive and break even, so therefore they will either make no profit or little profit.
The Loxford Business will only use retained profit if the amount is large enough, if not then there will be no need to use the retained profit.
Owners Savings
Money from the owner’s personal savings.
Internal
Cheap – because there is no interest that has to be paid.
Flexible – the money can be used for whatever reasons the owner please.
The disadvantages are:
It is risky - as you may waste your money.
Not enough money - The money may not be enough.
The Loxford Business Unit may use the owners fund if there is enough available however in order for the business to expand successfully the owners fund may not be enough.
Overdraft
A loan arrangement under which the bank extends credit up to a maximum amount.
External
Flexible- there when needed, Efficient - allows a business to make essential payments and maintains cash flow.
Quick – quick and easy to arrange.
Useful temporary cash
The disadvantages are:
I will explain the different sources of finance, some of which are internal and external to the Loxford Business unit. I will state the advantages and disadvantages of each of the sources of finance. Loxford Business Unit use both internal and external sources to get money in order to run the Business Unit successfully.
Source of Finance
Definition
Internal or external
Advantages
Disadvantages
Applicable to the Loxford Business Unit
Retained Profits
An amount of money saved aside from the business earning to be used when necessary.
Internal
The money doesn’t have to be repaid and there is no interest.
Also they are flexible as management -have complete control over how the money is reinvested and what portion is kept rather than paid as dividends.
The disadvantages are:
There will unhappy shareholders as they will receive lower dividends.
Also retained profit is not available for new business as they main aim will be to survive and break even, so therefore they will either make no profit or little profit.
The Loxford Business will only use retained profit if the amount is large enough, if not then there will be no need to use the retained profit.
Owners Savings
Money from the owner’s personal savings.
Internal
Cheap – because there is no interest that has to be paid.
Flexible – the money can be used for whatever reasons the owner please.
The disadvantages are:
It is risky - as you may waste your money.
Not enough money - The money may not be enough.
The Loxford Business Unit may use the owners fund if there is enough available however in order for the business to expand successfully the owners fund may not be enough.
Overdraft
A loan arrangement under which the bank extends credit up to a maximum amount.
External
Flexible- there when needed, Efficient - allows a business to make essential payments and maintains cash flow.
Quick – quick and easy to arrange.
Useful temporary cash
The disadvantages are: