In the process of analyzing decisions related to the capital structure, company executives operate with such concepts as internal and external sources of financing for an enterprise.
These categories of incoming cashrelevant for almost every organization. Depending on the scope of its activities, external financing and internal financing are applied in various proportions. Sometimes it is enough to attract fairly small amounts from investors and lenders; in other cases, the lion's share of the company's capital is borrowed funds. This article will describe the main external and internal sources of business financing. In addition, their characteristics and examples will be given, the advantages and disadvantages highlighted.
What is external financing and internal financing?
Internal financing is called the independent provision of all expenses for the development of a company (using its own income). Sources of such income can be:
- Net profit received as a result of conducting financial and economic activity.
- Depreciation accumulation.
- Accounts payable.
- Reserve funds.
- Funds set aside for payment of forthcoming expenses.
- Income received in the future period.
An example of domestic financing is investing the profits in the purchase of additional equipment, the construction of a new building, workshop or other building.
External financing involves the use of funds received by the company from outside.
Они могут быть предоставлены учредителями, citizens, government, financial and credit organizations or non-financial companies. The key to successful work of the enterprise, its development and competitiveness is to correctly and effectively combine internal and external sources of financing. The ratio of own and borrowed funds depends on the scope of the company, its size and strategic plans.
Types of financing
In addition to the division into two main groups, internal and external sources of financing are classified in more detail.
Internal:
- Due to net profit.
- Depreciation deductions.
- Sale of free assets.
- Income from the rental property.
External:
- Investment funds.
- Loans (loans, leasing, bill).
In practice, a mixed system is most often used: both external and internal financing of a business.
What is domestic financing?
Today, companies themselves are engaged in the distribution of profits, the value of which directly depends on how profitable business operations and effective dividend policy.
Based on the fact that managers are interested in the most rational use of funds that are at their disposal, they make sure that the most important factors are taken into account:
- Implemented plans for the further development of the company.
- The interests of owners, employees, investors were observed.
With the successful distribution of finances and expansionthe scale of the company's business, the need for additional funding is reduced. This is the relationship that characterizes the internal and external sources of funding.
The goal of most business owners is to strive to reduce costs and increase profits, regardless of what type of funds will be used.
Positive and negative aspects of using own financial resources
External financing and internal financing, as well as their effectiveness, are characterized by the extent to which managers are comfortable and profitable to use these types of funds.
Indisputable advantages of domestic financing,Of course, there is no need to pay the costs of raising capital from outside. Also of great importance is the ability of owners to maintain control over the activities of the company.
Among the shortcomings inherent in the innerfinancing, the most significant is the impossibility of its practical application. As an example, the failure of depreciation funds. They have almost completely lost their value due to the total decrease in depreciation rates at most domestic enterprises (in the industrial sector). Their amounts cannot be used to purchase new fixed assets. The situation does not save even the introduction of the order of accelerated depreciation, since it can not be applied to the equipment that exists now.
What is the term "external sources of financing"?
With a lack of own funds, business leaders are forced to resort to borrowing or investment finance.
Along with the obvious advantages of this approach(the ability to increase the volume of economic activity or develop new areas of the market), there is a need to return borrowed funds and pay dividends to investors.
Поиск иностранных инвесторов зачастую становится "Lifeline" for many businesses. However, with an increase in the share of such investments, the ability to control the owners of enterprises is significantly reduced.
Credit and its specifics
Loans as a tool for external financingbecome the most accessible way for the owners of the company, if internal sources are untenable. External financing of the company's budget should be enough to increase production and return the funds raised with accrued interest and dividends.
A loan is a sum of money that the lender provides to the borrower with the condition of returning the money given out and the agreed interest for the right to use this service.
Features of the use of credit funds to finance the company
Advantages of loans:
- The specificity of the credit form of financing becomes the relative independence of the borrower regarding the use of the amounts granted to him (no additional conditions).
- Often, to obtain a loan the owner of the companyIt appeals to the bank that deals with the maintenance of a particular enterprise, therefore the process of reviewing the application and issuing funds is fairly quick.
Disadvantages of attracting loans:
- Often a loan is given to an enterprise for a short period (up to three years). If the company's strategy involves long-term profit, the pressure of credit obligations becomes too great.
- To receive funds on credit, the company is obliged to provide a pledge equivalent to the desired amount.
- Sometimes the requirement of a bank to open an account becomes a condition for crediting, which is not always beneficial for the company.
Both external and internal sources of financingBusinesses should be applied as rationally and appropriately as the level of profitability of the enterprise and its attractiveness for investors depend on it.
Leasing: definition, conditions and characteristics
Leasing is a complex of various forms.entrepreneurial techniques that are beneficial for the lessor and the lessee, as they allow the first to expand the boundaries of activity, and the second - to update the composition of fixed assets.
Lease agreement terms are more liberal.compared to lending, since they allow a business owner to count on a deferment of payments and implement a large-scale project without large financial investments.
Leasing does not affect the balance of its ownand attracted funds, that is, does not violate the ratio characterizing the external / internal financing of the enterprise. For this reason, it does not become a hindrance to obtain a loan.
Interestingly, when buying equipment forterms of the lease agreement, the company has the right not to put it on balance during the entire period of the document. Thus, the manager has an opportunity to save on taxes because assets do not increase.
Conclusion
External financing and internal financing of enterprises involves the use of own revenues or the attraction of borrowed funds from lenders, partners and investors.
For the success of the company, it is of great importance to respect the optimal ratio of these types of financing, as well as the rational and reasonable use of any resources.
