The Advantages of Internal Sources of Finance

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Internal sources of finance are funded by owner infusions and retained capital from earnings. They come from inside your business, as opposed to commercial loans, which come from outside. Internal finance offers the advantages of autonomy, careful planning and interest rate savings.

There's no reason to borrow from a bank every time your business is poised to grow. If you're savvy and plan well, you can pay for many types of business expenditures out of the money your company generates on its own. This approach to managing company capital is called "internal finance" and it can include capital infusions from owners, surpluses from operations and sale of business assets.

TL;DR (Too Long; Didn't Read)

Using internal sources of finance mean there's no debt obligation or interest to repay.

Invest From Within, Stay In Control

One advantage of using internal sources of finance is your ability to maintain autonomy and control. When you take out a business loan, you must repay it according to a schedule that may or may not correspond with the rhythm of your company's earnings. Most loans require consistent monthly payments, but your business income may fluctuate dramatically from month-to-month and season-to-season. Using internal capital such as an owner's savings or the profits you've made form sales allows you to schedule your repayments for when it makes the most sense for your company.

Invest From Within, Maximize Your Earnings

In addition, a business loan may come with terms that limit your company's ability to maximize its earnings. For example, if you borrow money to build on a piece of commercial property, the loan terms may specify that you can only build for commercial, rather than residential purposes. This clause will severely limit your company's ability to make money on its investment. If you use internal sources of finance you can build whatever you want, as long as it's legal and feasible.

Invest From Within, Plan Your Business Growth

Using internal sources of finance offers the advantage of forcing you to plan more carefully and make more judicious decisions. Capital from outside loans can create the illusion that your business has the cash to spare, but once the capital infusion runs out you could easily find yourself with less money than you had at the start because you still have to pay back your loans, with interest. If you can only spend money that your company actually earns, you're unlikely to buy things you don't really need and you'll be more proactive about conserving cash. These are useful habits to develop, regardless of the source of capital you use.

Invest From Within, Make Interest Savings

When you use internal sources of finance such as cash from operations and from the sale of business assets, you reap the advantage of not having to make expensive interest payments. Even if your business borrows from one of its owners and does pay some interest, the rate is unlikely to be as high as a bank loan and certainly not as high as a credit card. These interest savings will leave you with more money in the bank to internally finance additional company operations in the future.

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About the Author

Devra Gartenstein founded her first food business in 1987. In 2013 she transformed her most recent venture, a farmers market concession and catering company, into a worker-owned cooperative. She does one-on-one mentoring and consulting focused on entrepreneurship and practical business skills.