Internal or external - where's the money coming from?

Internal sources of finance are available to the firm, but these may be more limited in scope and for large projects, the firm may be forced to turn to banks or other institutions (external sources) to help them raise sufficient funding.

Internal sources

Internal sources are often preferable to a firm as they will usually be cheaper and perhaps easier to arrange at short notice. However, the potential for arranging large amounts of finance may be low. The main internal sources are:

·         Profit - the company of course has to be profitable for this to be a source, and it must be available in cash. Often this is not viable as they may have paid the profit in dividend to the shareholders, or perhaps already tied the money up for other reasons.

·         Reduce working capital - the firm may be able to raise some money for investment if they can reduce their stock level (through improved stock control) or perhaps improve their credit control and ensure that they collect their debts more promptly and delay payment to creditors for as long as is possible.

·         Sale of assets or perhaps sale and leaseback - this will depend on the value of the assets, but the firm may either be able to sell surplus assets (if they have any) or perhaps sell existing assets that they use to a specialist leasing company and then lease them back. This will give them access to some capital, though they are then burdened with annual leasing costs.

·         Owner's Capital- Some people are in a fortunate position of having some money which they can use to help set up their business. The money may be the result of savings, money left to them by a relative in a will or money received as the result of a redundancy payment. This has the advantage that it does not carry with it any interest. It might not, however, be a large enough sum to finance the business fully but will be one of the contributions to the overall finance of the business.