Internal Finance
Business: BTEC Level 3 National Extended Diploma, topic 3.1.1
Internal Sources of Finance
Internal sources of finance describe the money that is created or raised within a business. The business doesn’t need any other stakeholder to get access to this money.
Retained profit
- This is the profit that the business has effectively saved whilst it has been operating (running).
- Retained profit is a cheap source of finance because a business does not have to pay any interest.
- Retained profit is limited. A business can only spend profits that have been saved.
- Retained profit may not be high enough to fund big, long-term projects.
Selling assets
- A business can sell its assets to raise cash. For example, a business can sell buildings or machinery that they do not use.
- They are usually a cheap source of finance because the business does not have to pay interest.
- However, selling assets can harm a business’ operations.
Personal savings
- This is personal money that is invested by the owner of a business.
- It is most relevant for start-up businesses, in which the entrepreneur has saved up to fund his business venture.
- A downside is that it can be very risky for an entrepreneur to put a significant amount of their personal savings into a business. They may not be able to afford this.
Test yourself on Internal Finance
What are three internal sources of finance?