🏠 What Are Internal Sources of Finance?
Definition: Internal sources of finance come from within the business itself — no outside lenders or investors are needed.
Internal finance is often the first choice for businesses because it doesn't involve interest payments or giving up ownership. However, the amounts available may be limited.
Think of internal sources as money the business already has or can free up — no need to ask anyone else! 🔑
💵 Retained Profit
Definition: Retained profit is the portion of a business's net profit that is kept (retained) in the business rather than distributed to owners or shareholders.
Advantages
- No interest to pay
- No need to give up ownership or control
- Immediately available — no application process
- Most common source of finance for established businesses
Disadvantages
- Only available if the business is making a profit
- May be limited — not enough for large investments
- Shareholders may be unhappy with lower dividends
- New businesses have no retained profit yet
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🏷️ Sale of Assets & Personal Funds
Sale of assets
A business can sell assets it no longer needs to raise cash. This might include old machinery, vehicles, spare land, or unused buildings.
- Quick way to raise a lump sum of cash
- Gets rid of unused or underperforming assets
- But — the business loses the asset permanently
- May not get full value if sold quickly (fire sale)
Personal funds (owner's savings)
For sole traders and partnerships, the owner can invest their own personal money into the business.
- Very common for start-ups and small businesses
- No interest payments or repayment schedule
- Shows commitment (useful when applying for loans later)
- But — limited to how much the owner has saved
Example: A florist sells her old delivery van for $3,000 and uses her personal savings of $2,000 to buy a newer, more fuel-efficient van for $5,000.
📋 Other Internal Sources
Reducing stock levels
Selling off excess inventory frees up cash that was previously tied up in unsold goods.
Tighter credit control
Collecting money owed by customers (trade receivables) more quickly improves cash flow without needing new finance.
Internal sources are LIMITED but LOW-RISK. They don't increase debt or dilute ownership — perfect for small needs, but often not enough for big investments 💡