The higher cost of Eternal Growth means that Internal Growth is the only suitable method for many firms.
Internal Growth is typically financed through a combination of ploughing retained profits back into the business, borrowing money from lenders, asking original shareholders to contribute more capital or issuing new shares to new investors.
So, how does a company pay for its Internal Growth?
Here are the following methods of raising finance for an expanding business. If you want to grow your business using Internal Growth, your sources of finance should also be mainly internal.
1. Retained Profits. The main source of organic growth is always retained profits. Retained profit means using the past profits made and kept by the business, after all of the costs, TAXes and dividends are taken out. While there might also be a need to raise interest-bearing capital, it involves less risk as the amount of capital involved is relatively lower. Many fast-growing businesses such as Adobe or Alphabet do not pay out any dividends to their owners but reinvest all their profits back into the business.
2. Private funds. Small business entrepreneurs may be willing to put their private savings into a business expansion. However, this action will probably only provide very limited funds.
3. Partners’ funds. Owners of a small business may decide to bring in a partner to help finance the expansion. But, that partner will most likely want some control of the business and a part of dividends as a reward for investment.
4. Bank loans. A business may want to apply to a bank for a loan. The bank will probably want some collateral. Collateral is the money or property that the bank can take, if the loan is not repaid by the borrower. The business will also have to write a business plan. In addition to banks, microfinance providers can support entrepreneurs enabling especially the disadvantaged members of the society to gain access to essential financial services.
5. Issuing shares. A share issue has positive effect on your company’s cash flow position meaning that you can get on with growing the business and pay for the resources needed. This capital does not need to be repaid, neither there is any interest on top of the repayments.
6. Venture Capital (VS) & Business Angels. These are organizations or individuals that mainly invest in start-up businesses that are growing very fast, hoping to gain big rewards in the future. But, they often take a certain, usually quite large, share in the business because of their investment.
7. Leasing & Hire Purchase. These external sources of finance prove to be useful for funding of new investments that require purchasing of land, buildings and equipment when a business lacks funds to pay for them in full. Renting is cheaper than buying.
All in all, Internal Growth is relatively inexpensive comparing with growing externally.
