2.1.1 Internal Finances

• Reasons to raise finance

  • To pay debts - consolidation loan to pay off suppliers
  • Help business over a slow trading period
  • To expand
  • To start up a business
  • To buy stock
• • When the finance comes from inside the business it is called an internal source of finance
• Owner's Capital

  • owner's equity
  • Personal savings
  • Owners may invest if there is a specific need (short - term cash flow problem)
  • May have used redundancy payment - this is owed back to the owner
• Retained Profits

  • Profits that was generated in the previous years & is reinvested into the business
  • cheap source of finance - doesn't involve borrowing & interest free
  • opportunity cost of investing back into business is that shareholders don't receive extra profit/investment
• Sale of asset

  • selling business assets which are no longer required( machinery, land) to generate a source of finance
  • sale and leaseback arrangement may be made if customer wants to use the asset but needs cash
  • Could make business look less attractive to investors
• • A business can also generate additional finance internally by managing its working capital more effectively
  • They can negotiate extended payment terms with suppliers
  • They can incentivise customers to pay more promptly for credit purchases
• Benefits of Internal finance

  • often free - no interest charges
  • don't involve third parties who want to influence business decisions
  • can be organized quickly with minimal paperwork
  • business that fail credit check can access internal finance easily
• Disadvantages of internal finance

  • significant opportunity cost - once retained profit is used, it isn't available to use for anything else
  • may not be sufficient to meet the needs of business
  • rarely as tax-efficient as loans could be considered as a business cost & offset against tax