What Are The Internal And External Sources Of Finance

1209 Words5 Pages
When considering the various sources of finance available to a business, it is useful to distinguish between internal and external sources of finance. By internal sources we mean sources that do not require the agreement of anyone beyond the directors and managers of the business. Thus, retained profits are considered an internal source because the directors of the business have power to retain profits without the agreement of the shareholders, whose profit they are. Finance from an issue of new shares, on the other hand, is an external source because it requires the compliance of potential shareholders. Within each of the two categories just described, we can further distinguish between long-term and short-term sources of finance. Long term sources of finance are defined as those that are expected to provide finance for at least one year. Short-term sources typically provide finance for a short period. Long term Sources of Internal finance Retained profits Retained profits are an important source of finance for most businesses. If profits are retained within the business rather than being distributed to shareholders in the form of dividends, the funds of the business are increased. Internal sources of finance usually have the advantage that they are flexible. They may also be obtained…show more content…
Ordinary share capital represents the business’s risk capital. There is no fixed rate of dividend and ordinary shareholders can receive a dividend only if profits available for distribution still remain after other investors have received their dividend or interest payment. If the business is wound up, the ordinary shareholders will receive any proceeds from asset disposal only after any lenders and preference shareholders have received their entitlements. Because of the high risks associated with this form of investment, ordinary shareholders will normally require a comparatively high rate of
Open Document