EXTERNAL FINANCE ITS MEANING

EXTERNAL FINANCE ITS MEANING

External finance is any way in which a company raises financing other than using its own money. This is most commonly involves issuing equity in the company such as selling stocks. It can also include taking out loans. As a general rule, raising external finance has a higher cost than internal financing.
There are two main ways for a firm to raise money. One is internal financing, which covers money generated by the business, most notably its annual profits. Internal financing can also include some other methods, including selling a physical asset such as a building. The other way of raising money is external financing, which usually involves getting cash from an outside source without giving goods or services in return. Instead of giving up goods and services, a firm getting external finance will usually give up either debt or equity.
Financing through debt involves taking out loans. This can be from investors rather than simply a single bank. The best known form is through bonds, which are a promise to repay the cash, plus interest, on a fixed date. Unlike most loans, a bond can be sold on to another investor, meaning the company may wind up repaying the cash to somebody other than who they borrowed it from.
Financing through equity involves selling a share of the company. This is also known as an equity issue. In some cases it is done by a private arrangement with a specified investor. In other cases it involves going public so that stock in the company can be publicly traded. The first time this is done by a company is known as the initial public offering.
Finally, there are several aspects of doing business which are classified as external finance, even though they do not fit the pattern of a company going out and looking for it. For instance many firms negotiate deals where they have 30 days or more to pay for goods they buy such as raw material. This effectively allows them to have the materials free of charge until the payment date, which counts as a form of finance. free credit score check