Internal and External Sources of Funds

Internal and External Sources of Fund

There are two type of funding companies utilizes to conduct business activities. Internal funding comes directly from the organization, and its owners. There many methods that internal funding can be achieved through, such as the owners putting the money into the company, selling of assets to raise capital, profits from the organization and depreciation of assets. External funding is achieved from other financial institutions, such as banks. External funds can be classified as bank loans, mortgages, and grants. In this paper I will discuss the differences between internal and external funds as well as, I will discuss when companies rely more on internal and external funding.

External funding is related to economic growth. When there is high external funding it usually means that the economy is growing (Gutmann, 1967). Businesses do not have balanced portfolio with internal and external funding. External funding is mainly utilized for investments, since internal funding is usually not enough. When a company decides to buy a building they have to get loans. Most companies find it is more cost effective and strategic to utilize external funding for investment purposes (Oliner & Rudebusch, 1992).

Most companies utilize internal funds to conduct daily activities. The company sells it's good or services, collects the money to pay to bills, pay the employees, cover all cost and the remaining monies are counted as profitability. Unfortunately if a company decides to expand or make investments this money is usually not enough to make these adventures. Additional funding is usually needed for expansion or extension, and external sources are necessary for these functions. Companies that are able to cover their daily expenses with internal funds are profitable.

Companies rely on internal funding for their normal day-to-day activities. Internal funding is necessary to keep the business functioning normally. In many cases companies rely on both internal and external funding when the business is getting started. At the start up point of any business organization, the owners usually are expected to have some capital to get started, and they can also get grants or loans to get started. When an organization decides to expand or make investments, they would usually rely on external funding. Most organizations do not have the finances to purchases buildings to get set up or vehicles for the employees. These types of investments are usually funded by external funding. Companies that are facing financial troubles because of low sales or some other financial reason would also utilize external funding if available.