When a business is expanding, it may need to raise funds to finance its

growth. There are two main sources of finance: internal and external.
Internal finance refers to the funds that a business generates from its own
operations, while external finance refers to the funds that a business
obtains from outside sources. Both sources have advantages and
disadvantages, which are discussed below.

Advantages of Internal Finance:

1. No interest or repayment obligations: Internal finance does not come
with interest charges or repayment obligations, so the business can
use the funds without worrying about these costs.
2. Retention of control: Internal finance allows the business to retain
control over its operations and decision-making, as it does not need
to answer to external investors or lenders.
3. No dilution of ownership: Internal finance does not dilute the
ownership of the business, as there are no new investors or
shareholders.

Disadvantages of Internal Finance:

1. Limited funding: Internal finance may not provide enough funds to
support the business's expansion plans, especially if the business
has limited profits or cash reserves.
2. Opportunity cost: By using its own funds, the business may miss out
on other investment opportunities that could provide higher returns.
3. Risk: Depending solely on internal finance may increase the risk of
the business, as there may be insufficient funds to cover unexpected
costs or changes in market conditions.

Advantages of External Finance:

1. Access to more funds: External finance can provide the business with
access to a larger pool of funds, enabling it to finance larger projects
or expand more rapidly.
2. Diversification of risk: By obtaining funds from external sources, the
business can reduce its reliance on internal funds and diversify its
sources of finance, which may reduce its risk exposure.
 3. Expertise and resources: External investors or lenders may bring
expertise, knowledge, and resources to the business, which can help
it to grow and succeed.

Disadvantages of External Finance:

1. Cost: External finance usually comes with costs, such as interest
payments or dividends, which can reduce the profitability of the
business.
2. Loss of control: External finance may require the business to give up
some control over its operations or decision-making, as investors or
lenders may impose conditions or requirements.
3. Dilution of ownership: External finance may require the business to
issue new shares or take on new shareholders, which can dilute the
ownership of existing shareholders.