Internal vs External Financing | Top 7 Differences (Infographics)

Differences Between Internal and External Financing

To perpetuate, a business needs funding. It can be from its resources, or it can be sourced from somewhere else. When a company sources the funding from its sources, i.e., from its assets, from its profits, we would call it an internal source of financing. When a company needs enormous money, and only internal sources are not enough, they go out and take loans from banks or other financial institutions.

If we make a quick comparison between these two, we would see that the importance of both of them is similar. However, a company would get greater leverage (and save on taxes) if it takes debt from outside.

In this article, we will talk about both of these sources of finance and do a comparative analysis of internal and external financing sources.

Internal-vs-External-Financing

Let’s get started.

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Internal vs. External Financing Infographics

There are a few differences between internal vs. external financing. Here’s the snapshot below –

Internal vs. External Financing Infographics

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Internal vs. External Financing Differences

Here are the key differences between internal financing and external financing –

Comparison between Internal and External Financing (Table)

The basis for Comparison – external vs. internal financingInternal FinancingExternal Financing
1.    Inherent meaningFinance is generated within the business.The finance is sourced from outside of the business.
2.    Application Internal sources are used when the requirement of funding is limited.External sources are used when the requirement of funding is huge.
3.    Cost of CapitalPretty low.Medium to pretty high.
4.    Why?The idea is to limit the business within a boundary (maybe not to grow so big).The idea is to expand from local to national to global.
5.    Amount sourcedLow to medium.Medium to huge.
6.    CollateralNo collateral is required.Most of the time, collateral is required (especially when the amount is huge).
7.    ExamplesRetained earningsRetained EarningsRetained Earnings are defined as the cumulative earnings earned by the company till the date after adjusting for the distribution of the dividend or the other distributions to the investors of the company. It is shown as the part of owner’s equity in the liability side of the balance sheet of the company.read more, reserves, profits, assets of the company;Equity financing, debt financing, etc.;

Conclusion

Internal and external sources of finance are both critical, but the companies should know where to use what.

The right approach is to use the right proportion of internal and external financing. If the company funds too much from its resources, it would be difficult for the company to expand the business. At the same time, if the company depends too much on external sources of finance, then the cost of capital would be huge. So, the company needs to know how to fund its immediate or long-term requirements.

Internal vs. External Financing Video

This article is a guide to the key differences between internal vs. external financing, along with infographics and comparative charts and practical examples. You may also have a look at these following articles