unit 5

• What is internal finance?

  Finance obtained within the business
• What is external finance?

  Finance obtained from outside the business
• What are the internal sources of finance?

  • Owners' funds
  • Retained profits
  • Working capital
  • Sale of assets
• How can owners' funds be injected into a business?

  A sole trader or partnership may inject money
• What is an advantage of using owners' funds?

  It is a quick and interest-free source of funds
• What is a disadvantage of using owners' funds?

  Owners must be willing to provide it
• What are retained profits?

  Profits used back into the business
• What is an advantage of retained profits?

  It is a quick and interest-free source of funds
• What is a disadvantage of retained profits?

  The business must actually be making profit
• What is working capital?

  The money available for day-to-day expenses
• How can a business increase its working capital?

  By reducing inventory or delaying payments
• What is a risk of using working capital for other purposes?

  It may lead to a cash flow crisis
• Why is sufficient inventory important for a business?

  To meet unexpected increases in demand
• What does the sale of assets involve?

  Selling buildings, vehicles, or parts of the business
• What is an advantage of selling assets?

  It can release large sums of money
• What is a disadvantage of selling assets?

  The firm loses the use of the asset
• What is short-term finance?

  Finance needed for a short period
• What is an overdraft?

  When a bank allows a business to withdraw more money
• What is an advantage of an overdraft?

  It is cheaper than a bank loan
• What is a disadvantage of an overdraft?

  Bank charges high interest rates
• What is trade credit?

  Credit extended by suppliers to businesses
• What is an advantage of trade credit?

  It is interest-free and easily available
• What is a disadvantage of trade credit?

  Start-ups may not be offered credit
• What is debt factoring?

  Selling debts to a factoring company for cash
• What is an advantage of debt factoring?

  It provides quick access to funds
• What is a disadvantage of debt factoring?

  The firm may not receive 100% of the debt
• What is leasing?

  Using an asset without owning it outright
• What is an advantage of leasing?

  Lower initial capital requirement for assets
• What is a disadvantage of leasing?

  Total cost of leasing is higher than purchasing
• What is hire purchase?

  Buying an asset through installment payments
• What is an advantage of hire purchase?

  The firm owns the asset all at once
• What is a disadvantage of hire purchase?

  The total cost is usually higher
• What are bank loans?

  Loans provided by banks for various needs
• What is an advantage of bank loans?

  They are quick and easy to get
• What is a disadvantage of bank loans?

  The bank will repossess assets if unpaid
• What is a sale and leaseback?

  Selling an asset and leasing it back
• What is an advantage of sale and leaseback?

  The firm gains a large injection of capital
• What is a disadvantage of sale and leaseback?

  The cost of leasing back is high
• What is venture capital?

  Investment from firms in high-potential businesses
• What is an advantage of venture capital?

  It often includes advice and consultancy