The advantages of internal sources of finance
Financing a business through internal sources of capital involves using available sources of capital such as personal savings and business reserves to finance business expansion and operations, rather than seeking loans and credit from external sources.
This approach to financing business activities is only possible when the business's principals have sufficient funds at their disposal to allocate some for their company's use.
When you finance your business activities internally, you are not accountable to any outside entity. You don't need to explain your business decisions to anyone outside your company or seek their approval before making changes or expanding. This decision-making freedom enables you to weigh personal as well as financial considerations when choosing the right course of action for your business. For example, if you have financed your business internally and you find yourself feeling drained and depleted, you can make the decision to take some time off or hire someone to replace yourself temporarily, even if this is not the wisest path from a strictly objective financial standpoint. If you were accountable to an outside financial entity, it might be more difficult to take care of your personal needs because they would probably pressure you to consider only the financial health of the business.
- When you finance your business activities internally, you are not accountable to any outside entity.
- If you were accountable to an outside financial entity, it might be more difficult to take care of your personal needs because they would probably pressure you to consider only the financial health of the business.
Internal financing allows you considerably more flexibility than outside sources of capital. If you finance you business internally and you experience a slow period that makes it difficult for you to repay a loan according to the schedule you have outlined, you can simply make an extra payment the next month. With internal financing it is usually easy to adjust payment terms in accordance with your current business cash flow and other unanticipated circumstances.
Credit Score Consequences
If you finance your business internally and have difficulty making your payments, this will not affect your credit score because you will not report yourself to the major credit agency if things do not go as planned.
Devra Gartenstein is an omnivore who has published several vegan cookbooks. She has owned and run small food businesses for 30 years.