The Internal Sources of Finance

The Internal Sources of Finance In order to grow your small business into a larger one, it is important to invest in it. And to invest in your business, you need access to finance. Unfortunately, external sources of finance — lenders and investors — are often skeptical of small businesses.

This can leave you to rely on internal sources of finance for investing in your business. Retained Earnings Retained earnings are an easy source of internal financing to use because they are liquid assets.Retained earnings are the portion of net income that you have retained in your company and not paid out. In a small business, retained earnings are usually paid out to the owners, who often do not draw a budgeted salary.

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Instead of paying out retained earnings, you can reinvest them into the company. Current Assets Current assets consist of cash or anything that can easily be converted into cash. For example, if your business has stock holdings in other companies, you can divest yourself of those stocks and use the proceeds as a source of financing.You should be careful, however, not to decrease your current assets to levels less than your current liabilities, as this may prevent you from paying off your debts. Fixed Assets Fixed assets are those that are not easily converted to cash. Typically, these assets include equipment, property and factories.

Because these assets take time to convert to cash, they cannot be relied on for short-term access to finance. If you have the time, however, you could — for example — sell off some equipment or even property to invest in your business.This is particularly useful if your needs have outgrown some of your fixed assets — for example, if you need to purchase newer equipment.

Personal Savings Personal savings are the backbone of many small businesses. If your business doesn’t have the assets to finance your project, you may still have personal finances that you can contribute to the business. This provides an alternative to seeking external investors or loans and allows you to retain control over your business.