3.2.1—Internal sources of finance

Internal finance is money generated within or introduced into the business: owner’s capital, retained profit or the sale of assets. It avoids an external lender, but it is still scarce and has a cost in what the business gives up.

Retained profit avoids interest and can be arranged quickly, while owner’s savings preserve control. Selling an asset or using sale-and-leaseback releases cash but may remove future capacity or create rental commitments.

A small retailer with retained profit can fund new stock without borrowing, but using all of it may leave no buffer for a cash-flow shock. The appropriate choice depends on amount, timing, existing assets, owner risk and the opportunity cost of other uses.

‘Interest-free’ does not mean free and internal finance is not automatically sufficient. Name the foregone alternative, the liquidity effect and the business purpose before recommending it.