Sources of Finance | AQA GCSE Business

Internal Sources of Finance

Personal Savings
- Owned by the business owner.
- Used to reinvest in the business.
Retained Profit
- Surplus revenue not distributed to owners.
- No borrowing involved; thus no interest.
- Opportunity cost: shareholders miss out on additional profits.
Sale of Assets
- Selling non-current assets (e.g. machinery, land).
- Sale and leaseback arrangements can provide cash while maintaining asset use.

Advantages:
- Often interest-free.
- Quick organization without paperwork.
Disadvantages:
- Significant opportunity cost.
- May not be sufficient for business needs.
- Less tax-efficient than external methods.

Overdrafts
- Flexible bank arrangement to spend more than the account balance.
- Interest is charged only when overdrawn.
Trade Credit
- Agreement to pay suppliers later (30-90 days).
- Typically interest-free.
Loans
- Borrowed sum repaid with interest over time.
- Requires approval and possibly collateral.
Share Capital
- Money from selling shares.
- Dilution of ownership occurs.
Hire Purchase
- Acquiring assets by spreading costs over time.
Government Grants
- Non-repayable funds for specific purposes.

Purpose: Long-term needs like fixed assets versus short-term needs like cash flow.
Duration: Short-term versus long-term options.
Amount Required: Large amounts via shares or smaller amounts via overdrafts.
Business Structure: Public companies can issue shares; sole traders rely on internal funds.
Risk: High-risk businesses may pay higher interest.
Control: Share issuance may lead to loss of control.

Sole Trader
- Needs quick stock replenishment.
- Options: Existing overdraft or trade credit.
- Recommendation: Seek trade credit first, then overdraft if needed.
Private Limited Company
- Needs finance for growth.
- Options: Selling shares or bank loan.
- Recommendation: Prefer bank loan to maintain ownership and profit share.