To understand the difference between internal and external

• To understand the difference between internal and external finance. • To be able to explain the main sources of finance. • Understand difference between long term and short term finance.

Internal Personal savings / Owners funds Retained profit Sale of assets External Share Capital Venture capital Loans / Mortgage Overdraft facilities Hire purchase Trade Credit Grants

• Long term finance is either never repaid over a long period of time (5 -25 years) Long term sources include: • Owners own capital/savings • Share capital • Venture capitalists • Loans • Mortgages • Retained profit • Leasing • Grants

• Short term finance is money that may have to be paid immediately or fairly quickly. (1 – 5 years) Short term sources include: • Bank overdraft • Trade credit • Factoring

Owner uses his or her savings and puts money into the business. Usually a sole trader will start up a business with their own savings.

A share in the business is sold to an individual or another business. This money is then used to purchase new assets or to expand. The business changes from a Ltd to a plc and shares can be traded on the stock market.

A person or company who buys shares in a business that they hope will grow fast. In the long term, they will sell the shares at a profit and often reinvest in other companies.

An amount of money is borrowed from the bank, then repaid (with interest) over a set period of time. The loan period can range from 1 year to 10 years. Look for the APR amount – the higher the APR the more interest is paid.

Long term loan provided by a bank in order to buy property.

Money kept in the business by the owners. Known as retained profit on the balance sheet. The retained profit is then available to use within the business, for developing the business or for a ‘rainy day’.

These are known as rental agreements. Businesses can rent equipment from other companies rather than buying them.

Money given to the business by the government and European Union. Used to help finance new projects – especially those that create new jobs. Some businesses may get grants to help them start up (especially small businesses). Organisation such as the Princes Trust give business start up grants to young people up to the age of 30. Grants DO NOT have to be repaid

The bank allows the business to draw more money from their bank account than they actually have in it. An overdraft of £ 2, 000 would let you go £ 2000 ‘in the red’ which may help a business in the short term. They have to pay interest.

TRADE CREDIT is when a supplier allows you a period of time (such as 30 days) to pay for goods and services. Items are bought from suppliers on a ‘buy now pay later’ basis. However, your customers may also expect TRADE CREDIT so the advantages of this can be cancelled out!

A source of finance where a business is able to receive cash immediately for the invoices it has issued from a FACTOR such as a bank instead of waiting the typical 30 days to be paid. A FACTOR is a financial service company like a bank and they charge a fee for this service. The company sells a debt it is owed to a debt factoring company who pay the business a smaller sum than they were owed.

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• To understand the difference between internal and external finance. • To be able to explain the main sources of finance. • Understand difference between long term and short term finance.