As the name suggests internal sources of funding are the sources within a business which generate fund or investment. These sources can be asset, operations within an organization, stock sale or debt collection. While, external sources are the sources outside an organization or business which generate funding. These sources can be investors, suppliers, etc.
The cost of fund raised by internal sources is low because of limited internal sources so they can only fulfill limited needs whereas external sources cost is high and hence many needs can be fulfilled. While raising funds from internal sources, it’s not necessary to provide security as it is within the organization but for external sources of funding it is required to provide security as we are dealing with outsiders.