Describe Sources of Internal and External Finance for a Selected Business.

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All businesses need money to function sufficiently. Where this money comes from is defined as sources of finance. There are two different types of sources of finance: internal (capital from inside the business) and external (capital from outside the business). New businesses starting up need money to spend in long-term assets such as premises and equipment. They also need cash to pay for materials, pay wages, and to pay the day-today- bills such as water and electricity. In-experienced entrepreneurs often underestimate the capital needed for the everyday running of the business; this is the reason many businesses fail due to cash flow issues even when profitable. Internal sources of finance can be found in existing capital of the…show more content…
It also does not have associated costs, and doesn’t have to be repaid, unlike loans, and finally it has no interest charges. On the other hand, investing into the business may be limited which will constrain the rate at which the business expands, as mine and my families resources are limited and wouldn’t meet start-up costs. Investing in external sources of finance can include using bank overdrafts, loans and venture capitalists, all of which my business would use. Bank overdrafts are good because my firm would only need to borrow as much as it requires when it needs it most. But the disadvantage can include it being very expensive and banks can insist being repaid within 24 hours which can be a problem. Therefore this is mainly going to be used for occasional cash flow problems, for example over tight times e.g. January and February. I would also use loans, as these can be secured quickly and used in a large number of ways. However borrowing too much money can lead to decreased cash flow and payments can even overtake income in some cases. Venture capital’s would also be a very good way to source finance externally, this is because usually want to contribute to the running of the business and bring in new experience and knowledge which could be vital to help the business grow. Whereas, they may require a substantial part of the ownership of the company, which could be a disadvantage because they would be receiving a substantial percentage

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