INTERNAL SOURCES OF FINANCE Flashcards
Internal Sources of Finance
Money obtained from within the business. It is easier to access if the business is already established.
Types of Internal Sources of Finance
- Personal Funds
- Retained Profit
- Sale of Assets
Personal Funds
Key source of finance for sole traders. The money comes from the owner’s personal savings.
Advatanges of Personal Funds
- Owner knows exactly how much money is availabke
- Maximized control over the business
- Shows personal commitment
- Don’t need to pay funds back to any financial instituion or investors.
Disadvantages of Personal Funds
- Large risk –> Can put a strain on family or personal life
- If the savings are not sufficient it can be dificult to start and mantain.
Retained Porift
Money that is left after the business has paid out dividends to its shareholders. The money is re-invested into the bsuiness for growth purposes.
Advantages of Retained Profit
- Flexible –> Used how the business wants
- Cheap –> Does not incur intrest charges
- Permanent –> Does not have to be repaid
- Control –> No interference with financial instituions
Disadvantages of Retained Profit
- Startups don’t have any retained profit.
- If too low, it won’t be sufficient for growth
- High retained profit means that very little or nothing is payed to shareholders. Not attractive to potential stock buyers.
Sale of Assets
Selling off unwanted or unused assets to raise funds.
eg. Obsolete machinery, redundant building, excess land or equipment
Advantages of Sales of Assets
- Good way of raising cash from capital that is tied up in assets that aren’t being used.
- No intrest costs
Disadvantages of Sales of Assets
- Only available to established businesses
- Time consuming to find a buyer
- DecreasedCollateral