2.1.1 Internal finance

Define personal savings

When an entrepreneur uses their own money (savings) to finance their business.

Benefits and drawbacks of personal savings

BENEFITS

• Quick to access - no applying for loans and needing to wait for approval.

• No interest payments - cheaper borrowing

• Shows commitment of owner.

DRAWBACKS

• High risk → may lose everything

• Takes time to build up savings → depends on income

• Limited funds → underestimate start up costs

Define retained profit

The profit that has been generated in previous years and not distributed to owners is reinvested back into the business

Benefits and drawbacks of retained profit

BENEFITS

• No interest to pay

• Quick assess → already available if profit has been kept

DRAWBACKS

• Shareholders may be unhappy – less money paid out as dividends

• Not always available – especially for start-ups or unprofitable businesses

• Over-reliance – may avoid using external finance even when needed

Define sales of assets

Selling assets (resources owned by the business) which are no longer required (e.g. machinery, land, buildings) generates a source of finance

Define working capital

Money a business has available for day-to-day operations.

Benefits and drawbacks of sales of assets

BENEFITS

• No repayments or interest – unlike loans

• Can be quick – especially if the asset is valuable and in demand

• Reduces waste – useful for clearing unused or outdated equipment

• Improves cash flow – especially helpful short-term

DRAWBACKS

• May be slow to sell – depends on the asset

• Might sell for less than it’s worth – especially second-hand or specialised equipment

• Could damage operations – selling something the business still uses

• Short-term fix – doesn’t provide consistent finance

Benefits and drawbacks of internal finance

BENEFITS

✅ No interest payments – reduces overall cost compared to loans

✅ No need to repay – money doesn’t have to be paid back over time

✅ Quick access – especially for retained profit or personal savings

✅Businesses that may fail credit checks (necessary for a bank loan) can access internal finance sources more easily

DRAWBACKS

❌ Limited availability – may not raise enough, especially for start-ups

❌ Opportunity cost – using internal funds means losing other potential uses (e.g. dividends, keeping equipment)

❌ May reduce future income – e.g., selling productive assets or keeping profits rather than investing them