Definition for : Internal financing

A company is financed internally when it ensures its development without using external Financial resources. Even if internal financing is perceived favourably by the partners of the company, and protects the latter from risks related to an excessive Debt burden, internal financing can become harmful when it is used abusively. Its explicit cost being zero, internal financing can encourage not very profitable Investment projects and thus cause the impoverishment of Shareholders. Only the reInvestment of profits at a Rate of return at least equal to Cost of equity makes it possible to preserve the Value of the reinvested profits.

(See Chapter 37 Distribution in practice: dividends and share buy-backs of the Vernimmen)

To know more about it, look at what we have already written on this subject