Describe the relationship between internal and external financing in meeting the long-term financial needs of a firm

There are two main ways in which a business can finance its operations; internally and externally.

Internally generated funds arise from the retained earnings. Instead of a firm distributing its profits it ploughs them back to the business. External funds are mainly from borrowing or from equity. A firm can approach the bank for a loan facility or issue an Initial Public Offering(IPO) to raise the funds required.

There is need to mix the two different types of funding so as to lower the weighted average cost of capital since some sources of funding are more expensive than others from tine to time.