External Financing

What is External Financing?

External financing is another source of capital for your business.

External financing can take the shape of two different types of financing, debt and equity. Debt financing includes bank loans where a company gets financed by issuing debentures which they have to pay back after a certain period of time. It is called debt financing because the company is in debt to the bondholders and if they were to go bankrupt, the bondholders would have a claim to any remaining assets. In this case, these are secured business loans.

Equity financing is when a company decides to give up ownership in the company to raise funds. This is usually done by selling company stock to investors through an underwriter (investment bank) or with no middle man (DPO). Sometimes this could include seeking out angel investors or venture capitalists. If you are expecting to get external financing through equity financing make sure that your business has a product or service that is unique, and that there is a high demand for your product or service. Most venture capital investors or even angel investors will not look at an offer unless they see large growth potential.

Both forms of financing have their positives and negatives so it is really up to the owners to decide which type of financing to use. One of the main things that an owner of a business should consider is how much ownership they actually feel comfortable with giving up. Often times when an investor puts money into a business they will want to have a lot of say in what happens, so make sure you are comfortable before pursuing that capital.

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