sources of finance

personal savings

a key source of funds when a business starts up

owners may invest more as the business grows or if there is a specific need (a short-term cash flow problem, for example)

retained profit

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

cheap source of finance since it does not involve borrowing, associated interest, and arrangement fees

sales of assets

selling business assets which are no longer required (e.g. machinery, land, buildings) generates a source of finance

a sale and leaseback arrangement may be made if a business wants to continue to use an asset but needs cash

internal sources pros

Internal finance is often free (e.g. it does not involve the payment of  interest or charges) and can usually be organised very quickly

It does not involve third parties who may want to influence business decisions

internal sources cons

There is a significant opportunity cost involved in the use of internal finance e.g. once retained profit has been used it is not available for other purposes

Internal finance may not be sufficient to meet the needs of the business