What is the difference between internal and external sources of raising funds? Explain.

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> [!TLDR]
> Internal sources come from within the firm (ploughed-back profits, faster collections) and meet only limited needs; external sources come from outsiders (lenders, investors, suppliers), can raise large sums, but are costlier and often need security.

**The basis:** On the basis of *source of generation* — where the funds come from relative to the organisation — sources are classified as **internal** or **external**.

**Internal sources**

- Funds **generated from within the business itself**.
- Typical routes: **ploughing back (reinvesting) profits**, **accelerating the collection of receivables**, and **disposing of surplus inventories**.
- **Limitation:** internal sources can meet only the **limited** needs of the business.

**External sources**

- Funds that lie **outside the organisation** — supplied by **suppliers, lenders and investors**.
- Used when a **large amount** of money has to be raised.
- They are generally **more costly** than internally raised funds.
- In some cases the business must **mortgage its assets as security** to obtain them.
- Examples: **issue of debentures, borrowing from commercial banks and financial institutions, and accepting public deposits**.

**Key points of difference**

- **Origin:** internal = from within the firm; external = from outside parties. …

Q.What is the difference between internal and external sources of raising funds? Explain.

Concept understanding — Classification of Sources of Funds

Q.What is the difference between internal and external sources of raising funds? Explain.

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