Internal sources of finance

Internal sources of finance come from inside the business: money it has already earned, or things it already owns. The two internal sources are retained profit and selling assets.

Retained profit

Retained profit is profit kept in the business instead of being paid out to the owners. Rather than taking all of the profit, the owners agree to leave some behind, where it builds up as a reserve the business can spend on growth.

Because it is the business's own money, retained profit can fund growth without borrowing. That avoids interest payments and the repayment of loan capital, so growth costs less overall and the owners keep full control of the business.

For example, a bicycle repair workshop making £60,000 profit might keep £21,000 of it towards fitting out a second workshop, paying no interest on that money. The catch is that retained profit is limited to the profit the business actually makes: a new business, or one with thin profit margins, may not earn enough to pay for large-scale growth, and owners must wait longer for a return.

Selling assets

Selling assets means raising finance by selling resources the business already owns, such as machinery, vehicles or property. It raises money without creating debt, because there is no loan to repay and no interest to pay, which keeps financial risk down.

However, the business may lose resources it needs. Sell a delivery van and deliveries slow down unless another van is hired or bought, which adds cost and reduces capacity, so the business becomes less efficient. The finance raised can then cost more in lost output than it provides.