Internal Sources of Finance

Question 1

Personal savings

Answer 1

Internal source of finance when a business owner’s personal savings fund the startup of their company

Question 1

What are the 3 internal sources of finance?

Answer 1

• Personal savings
• Retained profits
• Sale of assets

Question 2

Retained profit

Answer 2

Internal source of finance in which profit that has not been distributed to owners is used for reinvesting back into the business

Question 3

Sale of assets

Answer 3

Internal source of finance that occurs when a business sells assets which are no longer required such as machinery, land and buildings. There may also be a sale and leaseback arrangement if a company needs cash but still wants to use an asset.

Question 4

2 advantages of internal source of finance

Answer 4

• Often free and does not involve having to pay back interest
• Does not involve third parties who may want to influence business decisions

Question 5

2 disadvantages of internal source of finance

Answer 5

• Significant opportunity cost. If the money generated internally is used, it is not available for other purposes
• Internal sources of finance may not be sufficient to meet what the business is trying to accomplish with it