Internal and External Sources of Finance

Study Notes

Internal Sources of Finance

Primary purpose is to provide funding for business operations, expansions, and investments without incurring debt or dilution of ownership.
Businesses can utilize profits retained in the company rather than distributing them as dividends to shareholders.

External Sources of Finance

Examples include bank loans, credit facilities, venture capital, and issuing shares.
Typically used to fund larger projects or cover short-term cash shortages.

Reasons for Seeking External Sources of Finance

External funding can facilitate rapid growth and expansion, enabling businesses to take advantage of market opportunities.
It allows for larger amounts of capital that might not be available through internal means.

Internal Sources of Finance Examples

Retained earnings: profits that are reinvested into the business instead of being distributed to shareholders.
Depreciation funds: funds set aside from profits to cover the cost of asset replacements.

Advantages of External Sources of Finance

Provides access to larger amounts of capital needed for significant investments or expansion.
Business can maintain and enhance its operational capabilities without having to rely solely on its own funds.

Preference for Internal Sources of Finance

Internal sources often involve lower costs compared to external financing, which can incur interest and fees.
Retaining control is easier, as there is no need to share ownership or decision-making power with external investors.

Description

Test your knowledge of internal and external sources of finance with this quiz. Explore the primary purpose of internal sources of finance, examples of external sources, and the reasons why businesses often seek external sources of finance.