3.2 Internal Sources Of Finance

Question 1

Define internal sources of finance + state examples

Answer 1

the funds generated from within the business, w/out external assistance.
These funds don’t need to be repaid, = cost-effective way for businesses to finance their operations
internal sources of finance are:
• Personal funds (for sole traders and partnerships)
• Retained profit
- Sale of assets

Question 2

Define personal funds

Answer 2

= the savings / personal investments of the business owner(s) used to finance a start-up or ongoing operations
(For sole traders or partnerships)

Internal source of finance

Question 3

Evaluate personal funds

Answer 3

✅ No need for repayment, ⬇️ financial burden
✅ No interest charges
✅ Shows commitment, = easier to secure loans from banks or investors
✅ Quick + easily accessible source of finance
❌ Limited amount available, may = not be enough for expansion
❌ High risk for business owners, as they might lose all their savings if the business fails
❌ Sole traders often struggle to secure external funding, = over-reliant on personal funds

Question 4

Define retained profit

Answer 4

Internal source of finance
portion of a company’s net earnings that is reinvested into the business rather than being distributed to owners or shareholders.

Question 5

Evaluate retained profit

Answer 5

✅ No repayment or interest costs
✅ Permanent source of finance—once reinvested, it remains within the business
✅ Provides flexibility, as businesses can use retained profits for any purpose (e.g., expansion, debt repayment).
❌ Not available to start-ups, as they haven’t generated profits yet.
❌ May not be enough to finance large projects.
❌ ⬇️ dividend payments, may dissatisfy shareholders

Question 6

Define sale of assets

Answer 6

Internal source of finance
= selling a business’s owned resources (such as buildings, vehicles, equipment, or intellectual property) to ⬆️ finance

Question 7

Evaluate sale of assets

Answer 7

✅ Can generate a large sum of money, especially if selling high-value assets like property
✅ No borrowing costs or interest payments.
❌ may ⬇️ efficiency if essential assets sold
❌ Finding a suitable buyer can take time.
❌ Second-hand assets, especially obsolete ones, may sell for a low price.
❌ Only available to established businesses—start-ups typically don’t own valuable assets to sell.