Internal Sources Of Finance

Topics: Debt, Finance, Interest Pages: 2 (299 words) Published: April 25, 2015
Internal sources of finance
Proprietors capitol: this is the amount of cash and assets the owner contributes to the business Retained profits: money that the business makes and used within the business or taken as drawings by the owner. External sources of finance

Trade credit: used to purchase the goods they sell in their day to day operations Bank overdraft: takes money out of the bank like a loan
Term loans: usually taken for purpose and time frame
Leasing: instead of buying an asset they may lease it, which is like renting.

Advantages
Disadvantages
Capital
Intrest free fixed payments
Limited personal resources
Retained profits
Intrest free no repyments
May not exist must be eliminated by drawings
Trade credit
Ready avaliabe no intrest
Only for short term items
Bank overdraft
Flexible amoun. Available when needed
Fixed repayments must be budgeted for
Term loans
155

leasing

Flate rate intrest
Flate rate is intrest amount calculated on the amount that is borrowed Eg $12,000 at 10% for 3 years. Loan repayment is 4000 pa
Year 1: 10% of 12000= 1200
Year 2: 10% of 12000= 1200
Year 3: 10% of 12000= 1200
Reducing balance
Reducing balance intrest is calculated on the amount owing
Applying for credit
What do small businesses need to provide to gain credit?
Monthly income( shown in income statement)
Monthly expenses (shown in income statement)
Credit commitments
Credit history
Statement of assets and liabilities

Credit and gearing
Gearing is the dependence on borrowed funds compared to what the owner contributes to the business.

Debt ratio
debt ratio: liabilities/total assets
the higher debt, the higher the risk, the more pressure on the owner return on owners investment:
this measures the amount an owner is making on the investment that they out into the business’ ROI: net profit/ owners equity
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