Describe sources of internal and external finance for a selected business.

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P4:

 Describe sources of internal and external finance for a selected business.

Tesco:

Internal sources:

Internal sources of finance can be from the business owner’s savings or from profits.

  • Owner’s savings:

The owner of a business often has to use their own personal savings to start the business, particularly if they are a new sole trader (a person who owns and runs their business). This is because banks may not be willing to take a risk and invest in them. Savings are a good source of finance for a business, as interest does not need to be paid to someone else while the money is being used, and the business remains totally in eh control of the owner. The owner of tesco can use his savings and start up the business.

  • Capital from profits:

Once a business is operating it may be able to invest the money that it makes as profits back in the business. This means that even greater profits may be made in the future. The amount of profit to invest back in the business or in new business which will depend on how much profit the owner(s) want to keep for themselves against how much they want the business to expand. For some businesses it is not possible to use capital from profits for example, if they are a charity or non-profit organisation. The owner of tesco can use his money from one of his supermarkets and open a new supermarket.

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External sources:

External sources are sources that come from outside like if a business has been financed by outer sources.

  • Banks:

Banks are able to offer loans, business accounts, commercial mortgages and overdraft facilities based on the business plan. Interest is payable based on the predicted risk. Some security will need to be provided, for example, assets such as a house. Bank can provide loan to tesco.

  • Building societies:

Building societies are also able to offer loans, business accounts, commercial mortgages and overdraft facilities based on the business plan. Interest is payable based on the risk of the ...

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