We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What is External Finance?

John Lister
By
Updated May 16, 2024
Our promise to you
SmartCapitalMind is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At SmartCapitalMind, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject-matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

External finance is any way in which a company raises financing other than using its own money. This 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. It is not a cheap option, as there are extremely complicated rules to follow when carrying out the IPO, most notably about the way the company explains its financial situation to potential stockholders. After carrying out an IPO, future equity issues are known as a secondary equity offering. This can either involve owners of the firm selling some of their own stock, or the firm creating new stock to sell publicly. The latter situation is referred to as diluting the stock as it means each stockholder now owns a smaller proportion of the company.

There are several aspects of doing business which are classed as external finance, even though they don't fit the pattern of a company going out and looking for it. For example, many firms negotiate deals where they have 30 days or more to pay for goods they buy such as raw materials. This effectively allows them to have the materials "free of charge" until the payment date, which counts as a form of finance.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
John Lister
By John Lister
John Lister, an experienced freelance writer, excels in crafting compelling copy, web content, articles, and more. With a relevant degree, John brings a keen eye for detail, a strong understanding of content strategy, and an ability to adapt to different writing styles and formats to ensure that his work meets the highest standards.
Discussion Comments
By anon176159 — On May 15, 2011

Does anyone know if there is a genuine, honest, person or company that really does give loans? I have been scammed by five companies so far. They have their ways of keeping asking for fees or changing company policy after one and another and finally keep asking for more fees.

I know I sound like I am stupid but when you are desperate you do desperate things and will try all kind of ways but finally I am in deeper debts. Is there anyone honest out there? if there is please help me?

John Lister
John Lister
John Lister, an experienced freelance writer, excels in crafting compelling copy, web content, articles, and more. With...
Learn more
SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.