RESOURCES REQUIRED TO START A BUSINESS SUCH AS INTERNAL AND EXTERNAL SOURCES OF

FINANCE

Refer to 4.1-Sources of finance

Small businesses fail due to prospective owners cannot raise sufficient finance to commence
operations:

1) Buying existing business: Goodwill expensive, requires large capital outlay

2) Starting new business: Need enough funds to purchase all (A) to operate and to cover
initial period of business, as business may not earn enough revenue to cover its expenses.
3) Operating business: Need to access finance to meet costs or fund an expansion.

How to raise finance?

1) Internal sources: OE (2 types)

2) External sources: L (4 types)

Internal sources:

INTERNAL FINANCE: Funds generated by and within the firm, from OE

TYPE DESCRIPTION ADVANTAGES DISADVANTAGES

CAPTIAL DEFINTION: 1) No set 1) Limited to
CONTRIBUTIO repayment resources of
N An internal source of finance date owner
consisting of cash (or other 2) No interest
assets) contributed to the charge
business from the personal
assets of the owner
RETAINED DEFINTION: SAME AS CAPITAL 1) Limited to
EARNINGS CONTRIBUTION previous
an internal source of finance profits (which
consisting of funds generated may not
from business profits that are not
exist)
taken as drawings by the owner
 Used to expand
business operations

External sources:

EXTERNAL FINANCE: Funds generated from sources outside the business that is from L

TYPE DESCRIPTION ADVANTAGES DISADVANTAGES

TRADE CREDIT DEFINTION: 1) Immediate Trade credit
access to purchases can only be
a form of external finance goods/service used for purchases
offered by some s with only that
suppliers, which allows
2) Allows supplier.
customers to purchase
goods/services and pay at
business to
a later date generate sales
before
  CREDIT payment is
PURCHASE- required
Supplier
3) No interest
becomes
ACCOUTNS
charge if credit
PAYABLE terms are met
ACCOUNTS PAYABLE: (must be paid
within credit
a supplier who is owed a terms in order
debt by the business for to receive no
goods or services charge)
purchased from them on
4) Discounts are
credit
available if
paid suppliers
early.
BANK OVEDRAFT DEFINITION: 1) Readily 1) High interest
accessible charge
an external source of 2) Flexible- can 2) Can be
finance provided by a be used for a recalled at
bank that allows the
variety of short notice
account holder to
withdraw more than their
purposes
current account balance

 Safety net for

firms with
irregular cash
flows

TERM LOAN DEFINTION: 1) Can purchase 1) Interest

expensive (A) charge
a form of external finance 2) Flexible 2) Business need
provided by banks and 3) Secured loans to make
other lenders for a
attract lower repayments
specific purpose and
repaid over time
interest rate for the term
of the loan
 Increasing 3) Principle and
length of interest
loan- reduces repayments
amount of can put
instalment pressure on
but increases Cash flows
the amount
repaid
 Secured loan:
Loan secured
against a
particular (A)
so that if
borrower
defaults then
lender can
take the (A)-
 Mortgage
Mortgage:
a loan that is secured
against property
Unsecured loans:
higher interest charge
to compensate the
higher risk (no
collateral)
LEASING DEFINTION: 1) Reduces initial 1) No ownership
outlay to 2) Require
a written agreement that acquire (a) commitment
grants to the lessee the 2) Allows (A) to by business
right to use a particular
be updated for term of
asset for a specified
period of time in return
when become lease
for periodic payments to outdates or
the lessor obsolete
3) Reduces
 Business maintenance
applying for and repairs
lease is cost
known as the
lease and the
granting of
the lease is
the lessor.
 Lessee has
full control of
(A) but can’t
own it