P4- Describe the sources of internal and external finance for a selected business M2- Analyse the advantages and disadvantages of a range of different sources of finance for a selected business D1- Evaluate the best source of finance to meet the needs of a selected business.
Savings
When starting your own business a lot of people use savings that they have saved over a period of time. Most people can’t afford to start a business by just using savings. If you need to start off a business by just using savings, you will have to save huge amounts of money in order to get your business up and running. George is trying to start up his own restaurant and has managed to save £20,000; £20,000 isn’t really that much to start a restaurant up. As well since George has asked for the £50,000 mark. George could keep working in London for a couple more years to gain more savings and have a better chance of starting the dream business he wants.
Internal: Savings is an internal source because you’re taking the money from yourself and nobody else. It’s a source of money that is outside from your business, and has nothing to do with your businesses income or any money from your business.
Advantages: Ultimately, the more you save the more you have to spend on the business. You have full control of your personal savings and you can decide what to do with it. If you earn a lot of money, therefore you will have money spear so you can save the money a lot easier. The advantages for George would be that all the money is ready to take at any time and can be used on the business. This is good because if there is money going back into the business, the business can upgrade and become bigger and better, so in the long run the business will make an overall bigger profit. The main advantage of savings is no interest is built up on top of your own savings. This means no added on percentage is given when you have saved up your own money for the business. Another advantage is that you don’t have to pay anyone or any bank any money. This is a benefit for George, as he doesn’t have to think of ways of raising the money back to pay what he owes. Another advantage for using savings is that putting the money into a bank allows you to get interest back on your savings. This means the bank will give back a percentage of his money as a thank you. This results in George not needing to pay back anyone and getting an extra valued added back onto his savings. Therefore George will have a bit more money to spend on the business but not much. At the end of the day it’s the interest rate that matters. If the interest rate is good or the number is higher, the money George is going to get to spend on his business. Savings accounts and other savings vehicles such as certificates of deposit are advantageous because they provide the account holder with the opportunity to earn interest on his savings while having little to no risk. This is good for George because he doesn’t have to worry about his money getting stolen or the money being unsafe. Therefore George will give the bank a good name and can trust them with other things in the future. While the interest rates are typically low, the amount earned in interest is incentive for saving. Savings accounts and money market accounts are designed to provide the account holder with anytime access to George’s money. Certificates of deposit, or CDs, impose a penalty if the funds are withdrawn before the expiration date of the certificate, but generally have higher interest rates than savings accounts. George could be a lot more careful on the things he spends the money on because it’s taken him a long time to save up. Therefore the choses he makes on the business could be better then if he had the money form the bank. This is good because if the restaurant looks nice it will attract more people to it rustling in a bigger profit overall. If there is a bigger profit George could make the restaurant better or start up a franchise.