3.1 Sources of Finance

• What is the primary purpose of sources of finance for a business?

  To cover expenses
• Retained profits are profits that are reinvested back into the business instead of being distributed to shareholders
• Selling underutilized assets is an example of an internal source of finance.
• What is the main drawback of loans as an external source of finance?

  Interest payments
• Equity involves issuing shares to investors in exchange for capital, avoiding debt but diluting ownership
• Retained profits have no interest payments and maintain business control.
• Why might a business choose a loan over retained profits for finance?

  Large sums available
• Using retained profits as a source of finance may upset shareholders
• Loans require collateral and involve interest payments.
• What is a primary benefit of equity as a source of finance?

  No debt
• Retained profits are profits reinvested back into the business, avoiding the need for loans
• What is the main drawback of selling assets to raise capital?

  Loss of asset use
• Retained profits are an internal source of finance.
• Loans provide large sums of capital but require interest
• Why might a business issue shares instead of taking a loan?

  Avoid debt
• Retained profits maintain business control but may have limited availability.
• Internal sources of finance come from within the business, while external sources come from outside
• Match the source of finance with its characteristic:

  Retained profits ↔️ No interest payments

  Loans ↔️ Large sums available

  Equity ↔️ Avoids debt

  Sale of assets ↔️ Quick access to capital
• Loans are an example of an external source of finance.
• Internal sources allow a business to maintain full control
• What type of debt is incurred when a business takes out a loan?

  May incur debt
• Order the steps a business might take to secure external financing

  1️⃣ Identify financial needs

  2️⃣ Research available options

  3️⃣ Prepare a financial proposal

  4️⃣ Negotiate terms with lenders

  5️⃣ Secure the financing
• Which type of external financing does not require debt repayment?

  Equity
• Internal sources of finance maintain control and avoid interest payments.
• What are internal sources of finance?

  Funds from within the business
• External sources of finance come from outside the business.
• Retained profits are an example of an internal source of finance.
• What is a key advantage of internal sources of finance regarding control?

  Maintains full control
• Loans are an external source of finance that incur debt.
• Equity financing may lead to a dilution of ownership in the company.
• Arrange the following internal sources of finance in order of complexity:

  1️⃣ Retained Profits

  2️⃣ Sale of Assets
• What are retained profits in the context of finance?

  Profits reinvested into the business
• Match the internal source with its benefit:

  Retained Profits ↔️ No interest, maintains control

  Sale of Assets ↔️ Quick access to capital
• Retained profits do not incur interest.
• Selling underutilized assets provides quick access to capital.
• What is an example of a company using retained profits as an internal source of finance?

  Funding business expansion
• Selling unused assets reduces business costs.
• What is a loan in the context of external finance?

  Borrowing with interest
• An overdraft allows a business to have a temporary negative balance.
• What is equity as an external source of finance?

  Issuing shares for capital