Internal sources of finance
- Created by: alexialexi
- Created on: 25-12-20 23:35
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- Internal Sources of Finance
- ways of raising finance from within the business, used for capital or revenue expenditure
- OWNER'S CAPITAL
- 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
- money provided by the owner of the business
- RETAINED PROFIT
- 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
- SALES OF ASSETS
- the firm sells their unwanted NCAs
- might be the only available source of finance
- D: assets cannot be used anymore
- might be the only available source of finance
- 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
- the firm sells their unwanted NCAs
- 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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