Firms choose the sources of external funding primarily through three broad methods.

They are:-
1. Retained Earnings-
A portion of a company's net income or profit that isn't distributed to shareholders as
dividends is called Retained earnings. The funding gets retained within the company
for various purposes.
Advantages-

 It's safe, as the firm doesn't owe anyone anything.

 Dilution of ownership gets prevented.

Disadvantages-

 Shareholders lose interest.

 Arguably, RE belongs to the shareholders and not the company.

2. Debt Capital-
Funds get raised by a company after borrowing capital from any external sources
(such as banks, financial institutions, or individual investors) with the precondition of
repayment of the borrowed amount over a period. It is a form of financing involving
debt in exchange for capital.
Advantages-

 With borrowed funds, profit-sharing isn't necessary.

 It helps new companies to boost their credit score.

Disadvantages-

 The obligation of repayment within a specified period.

 Failure to do so can cause bankruptcy.

3. Equity Capital-
Capital gets raised through the distribution of shares or ownership stakes- in the
company. After entities purchase shares of a company, they become shareholders
and hold an ownership interest in the business. The funds received from the sale of
shares contributed to the company's equity capital.
Advantages-

 Investors get onboarded, so there's no pressure of repayment.

 Beneficial for companies with a poor credit history.

Disadvantages-

 New investors might disagree with management's views.

 With dilution, the company loses control as it sells off more shares.