Sources of investment

There are three main sources of investment funds viz. Internal funding, borrowing and Issuing new shares.

  • Internal funding using accumulated profits of a firm
  • Borrowing either from banks or through the issue of financial assets such as bonds (long term debt) or Commercial Papers (short-term)
  • Issuing new shares of stock—new “equity.”

Each of the above funding methods imposes explicit and/or implicit costs. For example, if the firm borrows in order to fund an investment, it pays interest cost. If the internal funds are used, it is forgoing other uses of those funds. Had the firm not used the internal funds for new capital, it could have earned interest on the funds by lending them or purchasing financial assets. This means that implicit cost of each rupee of internally funded investment is the interest of forgone lending.

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