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P4 Unit 2

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Why do businesses need finance?
Businesses need finance in order to start their businesses as they need to be able to handle their money. They will need finance to buy merchandise, buy a location to sell from and to employ people. If a business was to enter a new market or expand it would need financing as it would need advertising and the business would need to research as well. Financing would be important if a business was developing or creating a new product, this costs money in terms of research and marketing e.g. advertising campaigns and setting up retail outlets. Finance is needed to pay for simple expenses such as the cost of renting of removal vans, through to relocation packages for employees and the installation of machinery. A business may want to market their product as they are in a competitive market and competitors are always updating their merchandise.
Explain the difference between internal and external
Internal sources is finance which comes mainly frown own funds, profits and depreciation
The main internal sources of finance for sole proprietors are:
Owner's funds are when a buyer finances the purchase directly. This often occurs when the buyer can’t obtain funding through a conventional mortgage lender. · Selling personal assets · Profits · Depreciation External sources are capital obtained from financial institutions, such as banks, and from individuals willing to provide finance.

Loan cap
This is the most common way of external finance; this is through borrowing from a bank. It can be either a loan or an overdraft which is set over a period of time, which can vary from 2-5 years. There is an interest rate on the loan.

Share cap
Limited companies use this source of finance it can come from private investors or venture capital funds. Venture capital providers want to invest businesses that are going to have some dynamic growth

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