2.1.1 Internal Finance

Question 1

what are the three types of internal finance

Answer 1

1 owner’s capital
2 selling assets
3 retained profit

Question 2

outline and evaluate owner’s captial as a source of internal finance

Answer 2

• it is money from the owner’s often from their personal savings
• common source of finance used by sole traders or partnerships
  + it is easy to access and doesn’t need to be paid back
• however it is limited as it depends on personal wealth

Question 3

outline and evaluate selling assets as a source of internal finance

Answer 3

• selling assets (machinery, factories)to generate capital
• only appropriate for businesses with spare assets (not suitable for new or efficient businesses)
  + don’t have to pay interest
• can take a long time to generate capital

Question 4

outline and evaluate retained profit as an internal source of finance

Answer 4

• profit retained and built up
  + no interest
• not all businesses will make enough profit
• shareholders may demand dividends

Question 5

advantages of using internal finance

Answer 5

+ free (doesn’t involve interest)
+ doesn’t involve third parties who want to influence business decisions
+ can be organised quickly

Question 6

disadvantages of internal finance

Answer 6

• may not be sufficient to meet the needs of the business
• significant opportunity cost