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A company can fund itself in two ways. Internal financing draws on its own resources: retained earnings, working capital optimisation and asset disposals. External financing brings in third parties: bank loans, leasing, factoring, fundraising or public support. The right choice depends on the amount, how long the need will last and the cost you are willing to accept.
Key takeaways
- Self-financing preserves independence, but how much you can raise depends on past results.
- Debt funds investment without diluting ownership; equity funds risk.
- A short-term need calls for short-term funding, a lasting investment for medium- or long-term funding.
Internal financing: using your own resources
Self-financing
Self-financing means reinvesting retained profits, plus depreciation charges, to fund expansion, research or equipment upgrades.
Optimising working capital
Shortening customer payment times, managing stock better and negotiating supplier terms frees up cash without borrowing. It is often the quickest resource to tap.
Asset disposals
Selling an asset that is no longer strategic, or selling it and leasing it back, turns a fixed asset into cash.
External financing: bringing in third parties
Debt financing
- Medium- and long-term loans for major investments: equipment, property, R&D.
- Cash flow loans and overdraft facilities for one-off needs.
- Leasing, to have the use of equipment in return for rental payments, with a purchase option at the end of the contract.
- Factoring, which means selling your customer receivables to a factor in return for immediate payment of part of their value.
- Bond issues, which in practice are reserved for large companies.
Equity financing
- Capital increase by existing shareholders.
- Friends-and-family money and business angels, for young companies.
- Private equity, which backs growth, succession or international expansion.
Public support and hybrid financing
Bpifrance, the French public investment bank, offers loans, guarantees on bank loans and innovation grants. Between debt and equity, hybrid instruments (convertible bonds, mezzanine finance, participating loans) round out the range.
Internal or external financing: pros and cons
| Internal financing | External financing | |
|---|---|---|
| Advantages | Freedom of decision, no interest or dilution, quick to mobilise, stronger solvency | Greater funding capacity, leverage, access to partners’ expertise |
| Drawbacks | Capacity limited to past results, resources diverted from other uses, risk of under-investment | Cost (interest, fees), security required, covenants, dilution of ownership for equity |
| Best suited to | Moderate-sized projects, profitable companies with low debt | Major investments, rapid growth, needs beyond internal resources |
Which source of financing should you choose?
Four criteria guide the choice:
- The nature of the need. A cash timing gap is funded short term; an investment is funded over the life of the asset.
- The amount. It points you towards self-financing, a bank loan or opening up your capital.
- The total cost. Interest rate, arrangement fees, security, commissions: compare the overall cost, not just the rate.
- The impact on your financial structure. Debt ratio, bank covenants, shareholders’ stake in the capital.
Good to know. To get a loan, prepare a financing plan and a cash flow forecast. A bank lends more readily when it can see how the loan will be repaid.
Why manage your financing in a dedicated tool?
Once the funding is in place, you have to keep track of it: repayment schedules, variable rates, guarantees, covenants, leases. In a spreadsheet, tracking dozens of contracts quickly becomes fragile. Financing management software calculates repayments, updates variable rates and feeds your cash flow forecast automatically.
Customer story. The DomusVi group manages more than 140 loans in E-Financements and processes each one in under two minutes. Read the case study
Manage all your financing in one placeE-Financements tracks your loans, leases and repayment schedules and feeds your cash position.
Discover the solutionFrequently asked questions about sources of financing
What is the difference between internal and external financing?
Internal financing relies on resources generated by the company itself, such as retained earnings or working capital optimisation. External financing brings in third parties: banks, investors, factors or public bodies.
What financing is right for an SME?
Bank credit remains the main source, often supplemented by leasing for equipment, factoring for receivables and Bpifrance loans or guarantees.
What short-term financing is available?
A cash facility, an authorised overdraft, a cash flow loan, factoring or assignment of receivables. They cover temporary timing gaps, not lasting investments.
- Bpifrance — public financing for businesses (in French)
- Banque de France — statistics and publications on corporate financing and payment times (in French)
- economie.gouv.fr — practical guides from the French Ministry of the Economy for businesses (in French)
Director of Sales at E-Finances, a French financial software publisher for more than 25 years.
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