[jmherbener]

Professor Manish is referring to the opportunity cost of foregone interest income when a person self-finances his business. Instead of self-financing, if an entrepreneur borrows from the credit markets, then he pays interest to the lender. The rate of interest is determined by the market. If an entrepreneur self-finances, then he foregoes earning interest on the funds that he could have earned by lending them in the credit markets to a borrower. He must account for this opportunity cost of using his own funds by recognizing that his net income from production includes the interest income he could have earned by lending out the funds he used instead to self finance his operation. Whether he self-fiances or not, however, the rate of interest is determined by the market.