Sources of finance
Capital found from within a business is called an internal source of finance, whereas capital found from outside a business is an external source of finance.
Internal sources of finance
Retained profits
Retained profits are profits held back in the business for reinvestment rather than being issued as dividends.
Advantages:
- cheap, quick and convenient, and there is easy access to the money
Disadvantages:
- once the money is gone, it is not available for any future unforeseen problems the business might face
Selling of assets
Another internal source of finance is by selling unwanted assets, such as machinery and equipment.
Advantages:
- convenient, can create space for more profitable uses, and can be quick
Disadvantages:
- the business might not get the full market value of the assets or even sell them at all
- the business might also need the assets in the future
The owner’s savings
A third source of internal finance is the business owner’s own savings.
Advantages:
- cheap, quick and convenient
Disadvantages:
- the owner might not have enough savings or may need the cash for personal use
