Internal and External Sources of Finance

This lesson covers AQA A-Level Business topic 3.5.3 — sources of finance. You will learn about the full range of internal and external sources available to businesses, the distinction between short-term and long-term finance, and how to evaluate which sources are most appropriate in different business contexts.

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Internal Sources of Finance

Internal sources of finance come from within the business itself. They do not require borrowing from or selling shares to external parties.

1. Retained Profits

Key Definition: Retained profits are the portion of a business's profits that are kept (retained) within the business after dividends have been paid to shareholders. They are reinvested in the business.

• The most common source of finance for established businesses.
• No interest payments and no dilution of ownership.
• Only available if the business is profitable and has been trading for some time.
• Opportunity cost: shareholders may prefer higher dividends.

2. Sale of Assets

A business can raise cash by selling assets it no longer needs — such as surplus land, buildings, vehicles, or equipment.