Internal and External Sources of Finance PDF

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Surname, 1 Name: Institutional affiliation: Date: P4: Internal and External Sources of Finance Introduction For any business to thrive, it needs a constant cash flow. This financial resource can be from interior of the business (internal source) or from outside the business (external source). These sources refer to where a business gets its money from to fund or grow its business activities (Eduqas, 2016). Finance simply means managing an amount of money properly. The several sources of internal finance include; First, external sources require an owner to get finance from outside to fund or grow their business. This could be in terms of equity or bank loans (Noah Albin, 2016). Equity is where the shares of the business/company ownership are sold to outside sources that are willing to invest. It includes venture capital, hires purchase, share issue, partnership, and family and friends. For hire purchase, the business owners after borrowing some amount pay off in installments. That is, a certain amount of money is paid over a given period. Family and friends also count as an external source of finance for they could give or lend money to business owners, if willing. This money may not need to be returned but if it’s paid back, it requires a small amount of interest or no interest at all. This works to the advantage of the business owner since they do not have to worry about the due date of payment or interest charges. Secondly, venture capital consists of members who are willing to invest their money in a new/upcoming venture and return acquire some shares of the business. Partners are people brought into the business to contribute their money in exchange for parts of the business. When a

Surname, 2 business owner cannot raise enough money for their business, they can opt for a share issue: to sell more than the ordinary shares to outside sources to raise money to finance the business. In consideration of this, the buyer gets part of the ownership and some rights on the business like the vote on changes made in the business. These kinds of sources have one common disadvantage in which the business owners and the partners may have different visions for the business. Another external source is through debts by bank loans, promissory notes, or purchase of credit cards. The bank’s contribution is through loans, mortgages, and overdrafts, or business accounts, and this is based on the business plan. In bank overdrafts, a business owner spends more than the money in their bank account so that his bank balance reads in negative figures meaning that he/she owes the bank a certain amount of money. Due to the high-interest rates charged by a bank, this way is mostly used for emergencies. Although it is a quick way to access money, it only provides a solution for the short term. Conclusion Some financial institutes like banks are primary sources for small/new businesses. Banks could loan capital to business owners when they request a loan application. This loan request includes the amount of money to be borrowed, the purpose of the borrowed money, and the credentials of the owner or company related to the bank such as if they have an account with the bank. The bank then digs through their data to determine whether to approve the loan application or decline it. If the request is approved, the bank together with the owner discusses the interest to be paid as a debt.

Surname, 3 Works cited

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