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Internal sources of funds are those that are generated within a business enterprise. When an enterprise obtains funds by selling surplus inventories, collecting bill receivables or by reinvesting profits, these funds are said to have been generated from internal sources. Internal sources of finance can satisfy limited needs of a business as the amounts that can be raised from such sources are generally small.
On the other hand, funds raised from sources outside the organisation, such as the suppliers, creditors, investors, banks and financial institutions, are known as funds from external sources. The amounts that can be raised from external sources are large, and therefore these funds can be used to finance large operations.