Describe Sources of Internal and External Finance for a Selected Business.

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  • Topic: Venture capital, Startup company, Angel investor
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All businesses need money to function sufficiently. Where this money comes from is defined as sources of finance. There are two different types of sources of finance: internal (capital from inside the business) and external (capital from outside the business). New businesses starting up need money to spend in long-term assets such as premises and equipment. They also need cash to pay for materials, pay wages, and to pay the day-today- bills such as water and electricity. In-experienced entrepreneurs often underestimate the capital needed for the everyday running of the business; this is the reason many businesses fail due to cash flow issues even when profitable.

Internal sources of finance can be found in existing capital of the business, which can be made to stretch further. Also the business could use their own or their family’s savings to set up the business; however this could be difficult because if the business goes bankrupt no capital would be returned to the savings which could lead to family arguments. The business may be able to negotiate to pay its bills later, they can work at getting cash in advance from customers; the average small business waits 75 days to be paid; if that period of time could be halved, it would offer a huge increase to cash flow. There is also profit, as more than 60% of business investments comes from reinvested profit which is the cheapest form of investment as there are no investment charges.

If a business needs to make more finance and can't internally, they may seek external sources of finance. There are two main types of this, loan capital and share capital.
The most common way to receive loan capital is through borrowing from a bank. This can be in a form of an overdraft or loan and is more often than not set over a period of time. Loans could be short (i.e. 2-3 years), medium (i.e. 3-5 years) or long term (i.e. 5+ years). The disadvantages of these are that there will be an interest rate on the loan, either fixed...
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