Internal sources of finance come from within the business. Personal funds belong to internal sources of finance.
1. Personal Funds
Personal funds are personal savings of the owners. The owners, especially sole traders and partnerships, will use their own money as the main source of finance for their businesses.
Personal funds can also be used to start up rather small private limited companies when their owners do not want to face the issues of having unlimited liability for the business’s debts.
Example 1: In order to launch SuperBusinessManager.com, I used my personal savings as starting capital. My first start-up costs included payment for the server to the web hosting company that stores all the website files and to the Internet domain registrar that registered the domain name www.superbusinessmanager.com.
Why using personal funds as business money?
There are a few reasons which coincide with the disadvantages of unincorporated businesses. These reasons include being small, unknown and risky, as well as not being able to sell shares to outside investors and having no significant collateral.
- Small | This is because sole traders and partnerships, these rather small unincorporated businesses, usually only need to finance small capital projects. These small expenditures may involve registering the business with the government, paying rent, buying first sets of raw materials and initial equipment.
- Cannot sell shares | This is because sole traders and partnerships cannot raise any capital through the sale of shares. Only incorporated businesses including private limited companies and public limited companies can sell a part of their business to investors.Â
- Risky | This is because unincorporated businesses are considered by most traditional banks as being too risky. So, they refuse to approve large-scale loans to new entrepreneurs. Any owner or a partner in an unincorporated business is at risk of losing all of his private property, if the firm is in debt and fails.
- Unknown | This is because many sole traders and partnerships are most unlikely to raise funds through selling debentures. When a business wishes to raise funds, it will often sell such bonds to interested investors. The business agrees to pay a fixed rate of interest each year for the life of the bond, and return original investment back at the maturity date. Because long-term loans or debentures are usually not secured by any particular asset, small firms are unsuccessful in selling debentures as they are relatively unknown firms with high risk without much collateral.Â
- No collateral | This is because banks and other lenders are reluctant to lend money to smaller businesses as many sole traders and partnerships usually do not own much valuable Fixed Assets. The Fixed Assets which could have been used as collateral to secure the bank loan. The possible solution to overcome this problem would be for sole traders and partnerships to give personal guarantees, supported by the owners’ own assets, should the business get into financial troubles and fail.
While some people have very little savings to put into the business as personal funds, successful business managers such as Tim Cook from Apple, Marc Zuckerberg from Meta Platforms or Satya Nadella from Microsoft can inject substantial amounts of money into the firms. This is of course in case they decide to start their own business organization in the future after quitting their current well-paid jobs.
