Difference Between Internal Financing And External Financing

Difference Between Internal And External Financing

The main dissimilarities or difference between external source of financing and internal source of financing can be pointed out as follows:

1. Introduction

Internal Financing: Raising of fund or capital from within the firm is known as internal financing

External Financing: Raising of fund from outside the firm is known as external financing

2. Sources

Internal Financing: Retained earnings, owner's fund, assets, profits etc are the major sources of internal financing

External Financing: Bank loans, shares, debentures, mortgage loans etc. are the major sources of external financing

3. Purpose/Objectives

Internal financing: To fulfill limited capital requirement

External Financing: To meet huge capital or fund requirement

4 Cost Of Fund

Internal Financing: It requires low cost of capital

External Financing: It requires high cost of capital

5. Collateral Requirement

Internal Financing: Collateral is not required to generate funds from within the organization

External Financing: Collateral is required to raise huge amount of fund from outside the organization

6. Raised Amount

Internal Financing: Less amount can be raised

External Financing: Huge amount can be raised

7. Control

Internal Financing: Controlled by the management

External Financing: No control of management

8. Interest/Dividend

Internal Financing: No need to pay interest or dividend

External Financing : Interest or dividend should be paid annually

Internal Financing Vs External Financing (Comparison Chart)

Basis For Difference	Internal Financing	External Financing
Introduction	Fund raising from within the firm	Fund raising from outside the firm
Objective/Purpose	To meet limited financial needs	To meet huge capital requirement
Cost Of Capital	Less	More
Sources	Assets, profit, retained earnings etc.	Shares, debentures, bank loan etc.
Collateral	Not required	Required
Raised Amount	Less	More
Control Of Management	Yes	No
Interest/Dividend	No	Yes

I hope this post is helpful to understand the difference between internal financing and external financing and to make comparison between them.