9609 · 5.2.2
Internal and external sources of finance — FAQ
Frequently asked questions for 9609 Internal and external sources of finance. Direct answers first, then deeper explanation — then practise with marking.
Is internal finance always the cheapest and best option for a business?
Not necessarily. While internal finance, like retained profit, has no direct interest cost, it has a significant opportunity cost – the dividends forgone by shareholders. If the business cannot reinvest that profit to generate a return greater than what shareholders could get elsewhere, it may not be the 'best' use of the funds. Furthermore, internal sources are often limited in scale and may be insufficient for major expansion projects.
Does taking a bank loan mean the owner is losing control of the business?
No. A bank loan is a form of debt finance, not equity finance. The business is borrowing money and is legally obligated to pay it back with interest. The bank does not gain any ownership or voting rights. Therefore, the owners retain full control. However, the loan agreement may include certain conditions or covenants that restrict the business's financial activities to protect the lender's investment.
Can any business just issue shares to raise money?
No, this is a common misconception. Only incorporated businesses (private limited companies, Ltd, and public limited companies, plc) can issue shares. Sole traders and partnerships are unincorporated and cannot sell shares as they do not have a separate legal identity from their owners. For a plc, issuing shares to the public (flotation) is a very complex and expensive process regulated by stock exchange rules.