Internal sources of finance

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  • Internal Sources of Finance
    • ways of raising finance from within the business, used for capital or revenue expenditure
      • money provided by the owner of the business
        • from personal resources
      • used mainly for the start-up of the business
        • one of the risks taken by entrepreneurs when starting a business
      • Example: personal savings, redundancy payments
        • used by sole traders and partnerships, owners of limited companies need to buy shares
      • profit after tax that is reinvested from the previous year
      • cheapest source of finance, no financial charges e.g. interest
      • opportunity cost- profit cannot be returned to owners
        • small businesses- owners have less money to fund their lifestyles
        • limited companies- shareholders receive lower dividends
          • PLC- can lead to conflict between directors and shareholders
      • flexible source of finance- can be short and long term(used immediately or saved in a bank account to accummulate interest)
      • D: business might not make any profit, not available for new businesses, affects cash flow as all money leaves the business at the same time
      • the firm sells their unwanted NCAs
        • might be the only available source of finance
          • D: assets cannot be used anymore
      • sale and leaseback
        • selling the asset to a specialist company that will lease it back to the business
        • D: expensive longterm, rent payments are regular and there is a loss of control
      • A: instant cash is generated and responsibility for maintenance and upkeep is passed to the new owner
    • A- capital is available immediately, internal finance is cheap with no extra costs, no credit checks, no need to involve a third party
    • D- internal finance is limited, it's not tax- deductible, it is inflexible as there is not a wide range of choices, no inflationary benefits, opportunity cost can be gigh e.g. conflict between shareholders and directors in a plc


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