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 8. Equity financing can come from external or internal sources. Which of these is the least expensive and why?

 

Internal sources of finance can be manipulated more. A business has some say in when they pay their bills, like the beginning or end of a month or as installments. They can earn cash from customers on their time table, assuming the customers pay. If a company can collect their funds faster, then they will have more time to invest before having to pay bills. This can be done by offering customers incentive to pay sooner, like a small discount for paying in full in a set count of time. Benefits of internal sources are that the profit can be reinvested which can provide a return to investors which can then invest more which helps the company grow, internal sources do not have to be repaid, and there is no interest charge. A downfall is that the capital is limited by the already generated revenue. External source of finance are sometimes used if a company cannot gain enough from their internal capital generating streams. An example of an external source of finance would be a loan. They could also use a bank overdraft which is where the frim would only borrow the money it really needs, however this is expensive and banks often want the money to be paid back very quickly. They could use trade credit which is a good way to provide short term capital, but other companies may not want to trade with them if their payback period is not fast.