Internal sources are sources within the business or funds provided by the entrepreneur. They are often preferable to a firm as they are usually 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 can be categorized into two:
- For start-ups
· Personal Savings – An entrepreneur will often invest personal cash balances into a start-up. This is a cheap form of finance and it is readily available. Investing personal savings maximizes the control the entrepreneur keeps over the business. It is also a strong signal of commitment to outside investors or providers of finance.
· Other nest-eggs – Entrepreneurs can have silent investments which can be used to open up capital for them. Re-mortgaging is the most popular way of raising loan related capital for a start-up. The entrepreneur takes out a second or larger mortgage on a private property and then invests some or all of this money into the business. The use of mortgaging like this provides access to relatively low-cost finance, although the risk is that, if the business fails, then the property will be lost too.
· Borrowing from friends and family – Friends and family who are supportive of the business idea provide money either directly to the entrepreneur or into the business. This can be quicker and cheaper to arrange compared with a standard bank loan and the interest and repayment terms may be more flexible than a bank loan. However, borrowing in this way can add to the stress faced by an entrepreneur, particularly if the business gets into difficulties.
· Personal Credit – This is a popular way of financing a start-up. Each month, the entrepreneur pays for various business-related expenses from his personal finances. When the business has made some money (probably after a period of time) the entrepreneur gets back his money. The effect is that the business gets access to free credit.
2. For working capital
· Profit – ploughed back profits form a basis for working capital. However, the firm has to be profitable for this to be a source and the profit must be available in cash.
· 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)
· Improved credit control – the firm can raise funds by ensuring that they collect their debts more promptly and delay payment to creditors for as long as is possible.
· Sale of assets – this depends on the value of the assets. The firm can sell surplus assets (if they have any) and use the funds to grow their business hence an internal source of funds.
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