Definition of “internal financing”: What is it?
If you want to expand your operational financing, you may first think of credit expansion. Then you are at external financing. But in addition to external financing, look primarily at internal financing options. Simply put, internal financing includes all possibilities to generate cash without having to ask third parties for it. In many companies, such possibilities of internal financing exist.
Possibilities at a glance
Do you consistently know and use the main internal financing options available to you? They include the following areas:
- a working capital optimisation
- a tight receivables management
- the agreement shorter payment terms with customers
- the reduction of non-essential assets
- the Financing via suppliers
- the Sale and simultaneous agreement of a rent
- the Hire purchase
- and property-secured loans.
Advantages and disadvantages of internal financing
The sale of non-essential fixed assets or obsolete stocks (current assets) can often generate cash in the short term. Sometimes, however, price reductions have to be accepted if a sale is to be completed quickly. In a crisis, liquidity comes before profitability. Therefore, do not be afraid to make price concessions.
Good decisions in the operative business can reduce costs and lower payouts. A creative listing of such potentials is worthwhile in any case. Do not hang on to previous decisions if you can now generate cash through changed management. Even if you postpone or even abandon attractive projects, you may thereby ensure the survival of the company now.
Depending on the urgency and scope of the financing needs, sources of internal financing should be tapped before resorting to further external financing options. This is because external financing options are usually expensive.