Internal and External Sources of Finance Essay

I will explain the different sources of finance, some of which are internal and external to the Loxford Business unit. I will state the advantages and disadvantages of each of the sources of finance. Loxford Business Unit use both internal and external sources to get money in order to run the Business Unit successfully. Source of Finance Definition Internal or external Advantages Disadvantages Applicable to the Loxford Business Unit Retained Profits An amount of money saved aside from the business earning to be used when necessary. Internal The money doesn’t have to be repaid and there is no interest. Also they are flexible as management -have complete control over how the money is reinvested and what portion is kept rather than paid as dividends. The disadvantages are: There will unhappy shareholders as they will receive lower dividends. Also retained profit is not available for new business as they main aim will be to survive and break even, so therefore they will either make no profit or little profit. The Loxford Business will only use retained profit if the amount is large enough, if not then there will be no need to use the retained profit. Owners Savings Money from the owner’s personal savings. Internal Cheap – because there is no interest that has to be paid. Flexible – the money can be used for whatever reasons the owner please. The disadvantages are: It is risky – as you may waste your money. Not enough money – The money may not be enough. The Loxford Business Unit may use the owners fund if there is enough available however in order for the business to expand successfully the owners fund may not be enough. Overdraft A loan arrangement under which the bank extends credit up to a maximum amount. External Flexible- there when needed, Efficient – allows a business to make essential payments and maintains cash flow. Quick – quick and easy to arrange. Useful temporary cash The disadvantages are: Costs- overdrafts carry interest is often at much higher rates than loans, therefore making it expensive for a business for long-term borrowing. Recall – Unless specified in the terms and conditions, the bank can recall the entire overdraft at any time. This may happen if you fail to make other payments, or if you have broken terms and conditions; though sometimes the banks simply change their policies. They are terms and conditions. The Loxford Business Unit may use an overdraft as its quick process so it will give the business immediate money. Also this type of finance is suitable because the money will be available when needed. Venture Capital Money provided by investors to start up firms. External Willingness -The investors are more willing to invest. Gain information – The investors are a valuable source of information, advice and resources. Value added services – such as mentoring, alliances and advice. Provides funding that a business company needs to expand its business. The disadvantages are: Control- the investors will expect a say in decisions. Long process- It can be a long and complicated process. Lots of paper work required to provide such as a business plan, including financial records. Accounting Fee -The business will have to pay legal accounting fees whether or not they will successful in securing funds. Loxford Business Unit may use a venture capitalist for professional help and advice about achieving the necessary grades although this process will be long and complicated, it will be worth it in the long-term because it mean that students will achieve good grades overall. Bank Loan Borrowing money from the bank over a period of time which is then to be paid back with interest. External Reliability – Loans are very reliable and secure, you are assured the money for the duration of the loan (unless you break terms and conditions). Complicated process- Must have right documentations such as business plan and cash flow forecast. Money will be paid back with interest. A bank loan will be efficient for the Loxford Baines Unit because they will be given a large sum of money, which is to be paid back slowly and in instalments.