Internal sources of finance come from within the business. Sale of Fixed Assets belongs to internal sources of finance.
1. Sale of Fixed Assets
An asset sale happens when a business organization sells some of the property it owns to another party – an individual, an organization, a company or a government.
When selling Fixed Assets makes sense?
A business manager at a well-established mature company often finds that the business has some assets that are no longer fully employed. These assets could be sold to easily raise cash for funding new projects to stimulate business growth. In this way, the business is able to raise finance through the sale of unwanted or unused Fixed Assets. For example, selling old computers that have been replaced with new faster models, or selling old production machinery.
In case the business has decided to shut down its operations in the current location and relocate somewhere else, selling current land and buildings makes sense. In this way, substantial finance will be needed to establish itself in the new location.
Benefits of selling assets
- Free of charge. The main benefit of this source of finance is that it has no direct cost to the business. There is no interest to be paid.
- Large amount of money can be raised. The amount of capital raised by selling property can be quite substantial. Even unwanted land or buildings are likely to have very high commercial value.
- Making a profit. Certain types of assets, such as land, appreciate in value over time. For the owner, this may mean that, if the value of assets at the time of sale exceeds his total initial investment, he will earn the return from selling that asset.
- Helps with debt reduction. The proceeds from selling assets can be used to reduce or eliminate business debt, hence it will allow the business to lower interest payments and increase profitability. In extreme cases, sale of Fixed Assets can help defend against potentially disruptive events such as bankruptcies.
Drawbacks of selling assets
- Difficult to find a buyer quickly. The business may not have any unwanted assets to sell at the moment, or there is nobody who wants to buy them. Sometimes, it may even take as long as a few years to successfully sell a parcel of land.
- Old assets have no value. Sometimes, very old Non-Current Assets such as outdated machinery, old software or semi-broken furniture have no market value except for as scrap metals. If so, then the sale of such assets is unlikely to raise a lot of money.
- Various TAXes must be paid upon sale. When selling land, buildings and other tangible assets, both the seller and the buyer will usually need to pay TAXes. This will include paying transference TAXes and capital gain TAXes to finalize the transaction. it will subsequently lower the amount of capital that the seller receives in the end, and it increases the final price to the buyer too.
In very extreme cases, businesses will be forced to sell their Fixed Assets in order to survive a liquidity problem to keep the business running. The amount of finance raised in this way will enable the organization to run smoothly in the next several months.
