Explain the categories of internal sources of funds.

a) 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 loanrelated
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.

b) 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.

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Kavungya answered the question on March 26, 2019 at 06:42