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Source of funds: Internal sources of finance AO2

AO2 You need to be able to: Demonstrate application and analysis of knowledge and understanding Command Terms: These terms require students to use their knowledge and skills to break down ideas into simpler parts and to see how the parts relate: Analyse, Apply, Comment, Demonstrate, Distinguish, Explain, Interpret, Suggest

The syllabus lists these sources:

  • personal funds (for sole traders)
  • retained profit
  • sale of assets

Note: Internal means ' from within the business'.

Note: For a Sole Trader (proprietor) the most common form of finance is Personal funds that the owner puts into the biusiness. For larger organisations or established businesses the following are more appropriate:

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An evaluation of internal sources of finance

Internal finance has no direct cost to the business and is relatively convenient. It does not normally increase the liabilities of the business. However, in the case of sale and leaseback, there will be leasing charges. Internal sources are limited and relying on these to finance growth would severely limit the pace and scale of expansion, because the finance would be restricted by the extent of the profits generated.