2.1.1 Internal finance

what are the 3 types of internal finance

- owner's capital; personal savings
- retained profit
- sale of assets

what is owners capital

The money provided by the owners in a business.

common sources are; personal savings, redundancy payments, inheritance etc

Amount of money raised depends on the personal savings of the owner.

what is retained profit

profit after tax that is put back into the business and is not returned to the owner. (opportunity cost)

cheapest source of finance with no financial charges like interest and administration.

flexible - doesn't have to be used immediately. Can be retained in a bank acc. to earn interest.

what is sale of assets

when a business sells something that it owns but no longer requires

eg machinery, land, buildings etc

advantages of internal finance

+ capital is available immediately
+ cheap; no interest or administration costs
+ unlike external, businesses will not be subject to credit checks (help lenders see how well you've managed your money or credit in the past)
+ no need to involve 3rd parties

disadvantages of internal finance

- finance can be limited; business may not be sufficiently profitable with just internal assests
- non tax deductible, while external finances can be treated as a business cost and reduces tax
- can be inflexible compared to external finances; less options
- opportunity costs can be high