Distinguish between external and internal source of recruitment.
The points given below explain the difference between internal and external sources of finance:
- When the cash flows are generated from sources inside the organization, it is known as internal sources of finance. On the other hand, when the funds are raised from the sources external to the organization, whether from private sources or from the financial market, it is known as external sources of finance.
- Internal sources of finance include Sale of Stock, Sale of Fixed Assets, Retained Earnings and Debt Collection. In contrast, external sources of finance include Financial Institutions, Loan from banks, Preference Shares, Debenture, Public Deposits, Lease financing, Commercial paper, Trade Credit, Factoring, etc.
- While internal sources of finance are economical, external sources of finance are expensive.
- Internal sources of finance do not require collateral, for raising funds. Conversely, assets are sometimes mortgaged as security, so as to raise funds from external sources.