A Guide to Internal and External Sources of Finance

Every business, from a brand-new startup to a well-established company, will face the same challenge at some point: finding the money to keep moving forward. Whether you need funds to pay suppliers, launch a new product, or expand into new markets, the right source of finance can make all the difference.

When it comes to funding, you usually have two options:

Internal sources of finance (using your own resources)
External sources of finance (borrowing or raising money from outside the business).

In this guide, we’ll break down the different sources of business finance, share the advantages and disadvantages of each fund type, and help you decide which is right for your business.

What are internal sources of finance?

Simply put, it’s money that comes from within your business. Internal finance is often the first place business owners look, especially for covering smaller costs or short-term needs.

Examples of internal sources of finance

Retained profits

Money left over after paying expenses, taxes, and dividends.

Pros: No debt, no need to pay interest, you keep full control.
Cons: Takes time to build up and may not cover bigger projects.

Selling assets (asset monetisation)

Turning unused equipment, vehicles, or property into cash.

Pros: Quick cash boost, no debt involved.
Cons: You lose the asset and may have to sell at a discount.

Owner’s capital (personal funds)

When the owner invests personal savings into the business.

Pros: Shows commitment, avoids loan processes and interest payments.
Cons: Puts personal finances at risk, blurs business and personal money.

Internal finance examples like these are useful for short-term financing or plugging temporary gaps. But if you need larger sums of money or long-term financing, you’ll likely need to look at external options.

What are external sources of finance?

External finance refers to raising money from outside your business. An external source of finance is often the best option for growth, expansion, or bigger purchases.

Examples of external sources of finance

Debt finance (borrowing)

Borrowing money that must be repaid with interest.

Examples: Business loans, overdrafts, lines of credit, invoice finance.

Pros: Retain ownership; access larger sums than internal finance; flexible loans can adapt to cash flow.
Cons: Must be repaid with interest; can affect credit rating; over-borrowing risks financial strain.

Equity finance (investment)

Selling a share of your business in exchange for cash.

Examples: Angel investors, venture capitalists, crowdfunding.

Pros: Can provide large sums and valuable expertise.
Cons: You give up partial control of your business when shares are issued.

Grants

Government or agency funding that doesn’t need to be repaid.

Examples: Government grants and regional support schemes.

Pros: No debt or equity loss.
Cons: Competitive, strict criteria, often limited to certain industries.

External sources of finance can be both short term sources of finance (like overdrafts or trade credit) and long term sources of finance (like equity or bigger loans).

Internal vs. external finance

Feature	Internal finance	External finance
Source	From within the business	Banks, lenders, investors
Control	Full ownership retained	May give up equity or control
Cost	No interest (opportunity cost only)	Interest, fees, or equity
Speed	Instant (if funds available)	Can take 24 hours to months
Amount	Limited by resources	Potentially much larger sums
Best for	Small gaps, early funding	Growth, large purchases

How alternative external finance can help your business

Traditional financial institutions, like banks, can be a good source of funds for some businesses, but they’re not always the best fit. Applications can take weeks, and repayment terms are often rigid. This makes it harder to adapt if your cash flow changes or new opportunities arise.

That’s why many businesses turn to alternative finance providers. Modern, flexible loans are designed to give you more control over how you manage your funding. For example:

Speed: Lenders like Fleximize can make a decision and release funds in as little as 24 hours.
Flexibility: Options like repayment holidays, top-ups, or early repayment can help your business adapt as needs change.
Accessibility: Flexible loans may be available to a wider range of businesses, including those that might not meet strict bank criteria.

For businesses looking for an external source of finance that can adapt to changing circumstances, flexible loans – like those offered by Fleximize – can be a practical solution to support growth and manage cash flow without over-complicating the process.

Choosing the right funding for your business stage

The type of finance that makes sense often depends on your business’s stage of growth. Here’s a simple guide to help you decide:

Startup phase

In the early days, owner’s capital (internal finance) is commonly used to get your business off the ground. It demonstrates commitment and can help build confidence with potential investors or lenders.

Pairing this with a start-up loan (external finance) can provide the extra funds needed to cover initial costs like equipment, marketing, or premises.

Growth phase

As your business expands, flexible external finance becomes a valuable tool. Loans tailored to your cash flow can help you scale operations, hire new staff, invest in marketing, or purchase inventory without draining your internal resources.

This approach gives you access to larger sums while keeping day-to-day finances manageable.

Established business

For well-established businesses, internal finance like retained profits is often used for regular operating costs. However, external sources of finance can be a good option for major investments, such as moving into new premises, launching a new product line, or entering new markets.

Using a mix of internal and external funding allows you to grow strategically without putting your business at risk.

In summary

Every business will face the decision between internal and external finance.

Internal sources of finance give you control and avoid debt, but they’re often limited.
External sources of finance can unlock bigger opportunities, but they come with costs or shared ownership.

The best option depends on your stage, goals, and how quickly you need the money.

If you’re ready to explore a flexible external source of finance, see how much you could borrow with Fleximize. Our simple online application takes just minutes, and you could have funds in your account within 24 hours.

Apply for a flexible business loan today.