Internal & External Sources of Finance

Where does finance come from?

Finance comes from internal and external finance.

Internal finance comes from within the business (e.g., profits), while external finance comes from outside the business (e.g., loans or investors).

Sources of finance for limited companies

What are internal sources of finance?

• Owner’s savings

• Retained profits

• Use of some of the business’s working capital

• Sale of non-current assets such as equipment and machinery

How are profits retained in the business?

• If a company is trading profitably, some of these profits are taken in tax by the government (corporation tax), and some is nearly always paid out to the owners or shareholders (dividends)

• If any profit remains, the money is kept (retained) in the business and becomes a source of finance for future activities.

What are the advantages and disadvantages of using retained profit?

Advantages -

• The money is immediately available