Customers finance companies by paying companies more than the total costs of producing the product. Total costs include the direct materials and direct labor used to produce the product as well as the factory, management staff, etc. Companies producing more relevant and desirable products are able to extract more profit from their customers.
Profits are an important source of financing for companies. Customers paying firms profits do not require compensation in return. Customers do not require subsequent interest payments or ownership interests. Companies can use the profits to expand organically, without having to raise outside capital that comes with demands.
Why is outside capital more costly? Outside capital finances the company so that the company can extract profits from customers in the future. The ability of the company to produce a relevant product and extract future profits is uncertain and risky. Outside capital requires compensation for bearing risks.
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