Sources of finance - OCRWays of raising finance internally

Finance is used to address short-, medium- or long-term needs and can be sourced internally from a business’ own capital, profit or assets, or externally from banks or other investors. However, a business must consider the advantages and disadvantages of each method before deciding which is the best option. The methods available to a specific business depend on the business type.

There are several ways for a business to raise money internally.

Owner’s capital

Owner’s capital is money that has been saved up by an entrepreneur. It is commonly used during start-up or expansion, or to replace capital equipment. It is most suited to new or established businesses and is available to sole traders and partnerships.

This source of finance does not cost a business any money, as there are no interest charges. However, if the owner or owners of the business do not have enough savings, they will need to use an additional source of finance.

Retained profit

When a business makes a profit, it can leave some or all of this money in the business and reinvest it in order to expand. Therefore, this source of finance can only be used by established businesses.

This source of finance does not incur interest charges or require the payment of dividends, which can make it a desirable source of finance. However, it is only available to businesses that have made a profit.

Sale of assets

A business can sell a fixed asset in order to generate finance. Because the business must own the asset, this source of finance can only be used by established businesses. It is commonly used to fund expansion or replace capital equipment.

This is a good source of finance to use if the asset is no longer of use to the business. A disadvantage of this source of finance is that it can take time to sell the asset or a buyer may not be found.