Internal sources of finance, and what each one costs you

Internal sources of finance are money your company raises from what it already has, rather than from a lender or an investor. A limited company has four: profit you keep instead of paying it out, assets you sell or lease out, cash you free up from day-to-day trading, and money the directors put in. None of them charges interest, which is why they usually come first. None of them is free either: each one costs you something you could have done instead.

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What counts as internal, and what doesn't

The test is whether the money is already yours. Retained profit, your own assets, the cash moving through your business, and the directors' own funds all pass it.

Anything that needs someone else to say yes does not, and that is external sources of finance: a bank loan, an overdraft, a grant, a crowdfunding round, or new shares sold to outside investors. Three things catch people out. An overdraft feels internal because it sits on your own account, but the bank sets the limit. Trade credit frees up cash in much the same way as working capital, but it comes from a supplier, so it is external too – our guide on whether trade credit is internal or external explains why. A director's loan is internal in cash terms, though the company still owes the money back.

Choosing between inside and outside money is its own job, and our overview of sources of business finance covers it.

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Retained profit: what's left after tax and dividends

Retained profit is what the company keeps after corporation tax and any dividends, building up on the balance sheet year after year. It funds most growth that happens without borrowing: a new hire, a machine, a product line.

Corporation tax comes off first. On profits of £50,000 or less you pay the small profits rate of 19%, on profits over £250,000 you pay the main rate of 25%, and marginal relief applies in between (gov.uk, checked 20 October 2026). Dividends come next, and there is a limit on those. Under section 830 of the Companies Act 2006 a company can only pay a dividend out of profits available for distribution, which means accumulated profits less accumulated losses. A good year on its own is not enough if earlier losses are still sitting there.

Here is how it works through for a company making £40,000 before tax.

Illustrative figures. Profit here means net profit before tax, not gross profit.

Then the part that catches directors out: retained profit is an accounting figure, not money in the bank. You record profit when you make the sale, and the cash only arrives when the customer pays. If £15,000 of that £20,400 is sitting in stock and unpaid invoices, you have £5,400 to spend. The useful question is not how much profit you made. It is how much cash you can commit without running short.

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Selling or leasing out assets

Selling something the business owns raises cash quickly and adds no debt. It works well when the asset is genuinely surplus: kit you replaced and never sold, a spare vehicle, stock that is not moving.

It works badly the moment the asset is still earning, because the price then has to beat the work the asset would have done, and it rarely does. Second-hand equipment also sells for less than you expect, and there may be tax to pay on a gain. Leasing an asset out instead, by renting space, equipment, or a vehicle to another business, keeps the asset and gives you an income, at the cost of wear, insurance, and a contract to manage.

Selling an asset and renting it straight back is a different thing. That is borrowing against something you used to own, and it belongs on the external list.

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Freeing up cash from working capital

This is the fastest of the four and the most overlooked, because the money is already in the business, tied up in the gap between paying for things and being paid for them. Three levers move it: collect from customers sooner, hold less stock, and pay suppliers later.

The arithmetic is simple. Take your annual sales, divide by 365, and multiply by the days you save. A company with £600,000 of sales that moves its customers from 60-day to 45-day payment frees up about £24,700, once.

Stock is usually where the most cash is stuck. Chris Billingham founded Muscle Squad, which sells fitness equipment and holds around £500,000 of inventory: 'These are low-volume, high-value products. They can sit in the showroom longer, and that ties up more capital.'

Two of the three levers come with a catch. Chasing customers harder and paying suppliers later both work by pushing the problem onto somebody else, and a supplier who gets paid late will price for it eventually. Holding less stock has no such cost, which is why it is the one to try first. There is more on all three in our guide to working capital management.

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Money from the directors

A director can put their own money in, either as more share capital or as a loan. A loan is the usual route, recorded in the director's loan account.

Your company pays no corporation tax on money you lend it, and taking your own money back out later is not income. If you charge the company interest, that interest counts as a business expense for the company and as personal income for you, so the company pays you the interest less income tax at the basic rate of 20% and reports it to HMRC every quarter on form CT61 (gov.uk, checked 20 October 2026).

Money going the other way is not the same thing. A company lending money to a director is cash leaving the business rather than a source of finance, and if it is not repaid in time the company faces a tax charge on the balance. Either direction is worth a conversation with your accountant first.

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What internal finance actually costs you

There is no interest, so the cost is whatever the money could have done instead. Spend your reserves on a van and the tax bill in three months has to come from somewhere else. Sell a machine and you have the cash but not the capacity. Take cash out of stock and you have the cash, and less to sell.

The one that does real damage is the buffer. Cash sitting in the account apparently doing nothing is also what absorbs a customer who pays a month late, a quiet August, or a repair you had not planned for. Commit all of it to something productive and you have swapped a known cost for an unknown one.

So internal finance is cheap rather than free, and the limit on it is not what you have. It is what you can afford to stop having. A cash flow forecast that runs a few months past the spend is the only honest way to find that number.

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When your own money isn't enough

If a cost fits comfortably inside your own cash, paying for it yourself is cheaper than borrowing. When it does not, because the order is bigger than your reserves or the timing is wrong, outside money buys you the thing you cannot fund yet and leaves your buffer where it is. An iwoca Flexi-Loan is a business loan with flexible repayment options for UK limited companies, and because repaying early carries no fee you can clear it as soon as your own cash catches up – many of our customers only take out our finance for a few weeks, or even days.