Page 258 - Cambridge IGCSE Business Studies

Cambridge IGCSE Business Studies Section 5 Financial information and decisions

The more profitable a business is, the easier it will be for them to finance some of

their plans through retained profit. However, for a limited company this might mean
reducing the dividends paid to shareholders. Banks and other lenders are more likely

to lend to businesses earning high profits because they are going to be able to make
interest payments and repay the amount borrowed when it becomes due.

Some sources of finance are usually only available for very specific uses. For
example mortgages are only available for the purchase of land or buildings. Leasing
is only available for financing physical assets such as cars, machinery and property;

it could not, for example, be used to finance a major advertising campaign.

Finally, some sources of finance may affect the ownership of a business. For
example a sole trader might enter into partnership, or a private limited company
might convert to a public limited company. In both of these cases the original
owners of the business may lose some control over the business.
TEST YOURSELF
1 Explain the difference between internal and external sources of finance.

2 Explain the main advantage of retained profit as a source of finance.
3 Identify three factors that influence the choice of finance.

4 Explain the advantages large businesses often have over small businesses when
they borrow money from banks.

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