Which option is an internal source of finance that uses profits kept in the business?

Which option is an internal source of finance that uses profits kept in the business?

• A. Loans
• B. Retained profits
• C. External Sources of Finance
• D. Shares

Answer: (B)

Internal sources of finance come from within the business, using money the company has already earned. Retained profits are profits that are kept in the business instead of being paid out to owners as dividends. Because they come from the firm’s own earnings, they can be reinvested to fund growth or cover expenses without needing to borrow or issue new shares. There’s no interest to pay and no external investors involved. Loans are money borrowed from outside and must be repaid with interest, so they’re external financing. The broader category of external sources of finance includes options like loans, leasing, or selling shares. Shares involve selling part of the business to outsiders, which also brings in external money and can affect ownership.

Internal sources of finance come from within the business, using money the company has already earned. Retained profits are profits that are kept in the business instead of being paid out to owners as dividends. Because they come from the firm’s own earnings, they can be reinvested to fund growth or cover expenses without needing to borrow or issue new shares. There’s no interest to pay and no external investors involved.

Loans are money borrowed from outside and must be repaid with interest, so they’re external financing. The broader category of external sources of finance includes options like loans, leasing, or selling shares. Shares involve selling part of the business to outsiders, which also brings in external money and can affect ownership.