Difference between external financing and external financing based on examples
Anyone who is economically active, has a company or is self-employed must invest money. These funds are necessary when you want to buy materials or offer services. A capital requirement arises and this can be covered with external financing or external financing. The decisive factor is where the various financial resources come from and whether you can freely dispose of them.
The terms external and debt financing sound very similar, but mean different facts. Outside capital does not come from the company, but from external donors. Whether these funds are considered leveraged depends on whether you have free access to the funds.
The difference between external financing and internal financing
Companies produce goods or offer services. A baker, for example, sells bread rolls and other baked goods. A hairdresser cuts hair and thus performs a service. But in order to offer or Investments are necessary to be able to manufacture these products. There is a need for financing, i.e. money is needed.
- As a baker, you have to buy flour, sugar and other ingredients, pay for salesrooms, employees and other things. A hairdresser has to pay for scissors and styling items. Especially when founding a company or expanding new branches of business (e.g. B. when opening a new bakery branch) a lot of capital is required.
- In economics, the funds required for this (financing) are broken down according to where they come from and what legal status the donors have. Here you can differentiate between internal and external financing.
- Internal financing means that the funds in question are already available in the company and have been generated. If you as a baker make a profit and use it to pay for the initial equipment of a new branch, then you have made internal financing.
- With external financing, in contrast, you use capital that you do not yet have and that does not yet exist in your company. The funds are replenished - for example when the baker receives the money for a new branch through a bank loan.
- But if you use different financial resources that do not come from you and which you have not generated, you are dependent on others. You need to find financiers or bring existing financiers to increase financial support. These sources of external financing can be banks, investment companies, shareholders or investors.
- In return, the investors receive shares or bonds. In one example it could look like this: As a baker, you take out a loan from a bank. The bank will give you a contractually agreed amount of money that you can use for your new branch. However, you have to repay this amount - divided into installments. The financing resulted in a debt that you pay in installments. This will make you a believer. In addition, you pay interest to the bank.
At school or during your studies, you are probably already familiar with the field of ...
Borrowing money from a bank is both external and external financing. In addition, there is external financing that comes from within - from your company.
You may not freely use funds from outside financing
In addition, there is financing that is viewed as external, which, in contrast to self-financing, comes from within - from your company.
- Instead of borrowing money from a bank, you can also use reserves. This is a debt and an external financing. Bank loans are external finance because the money you get comes from the financial institution. At the same time, bank loans are outside financing, i.e. the bank does not belong to your company and is not involved in it.
- With self-financing, the funds you use come from your company or people related to it. Anyone who has a stake in a company (e.g. B. Shareholders, members of a housing association, shareholders of a company) and thereby provides financial support, serves as self-financing. The funds do not belong to the company directly, but to persons or companies that are closely related to the company.
- In the case of third-party financing, the funds come from different institutions that are not involved in your company. Loans are therefore externally financed and externally financed. Participations, on the other hand, are externally financed self-financing.
- If you use your own funds, it is internally financed self-financing. A distinction must be made between these provisions, however, which are considered to be internally financed but nonetheless externally financed.
- Provisions are reservations of financial resources. For example, when you know you are going to have a major expense, you create a fixed financial reserve and this is known as a provision. The provisions are tax-privileged; they are not taxed like profit, but rather conserved.
- Because provisions are earmarked (e.g. B. the provision for a new bakery branch), the associated funds cannot be freely used for the company. Provisions are therefore regarded as internal external financing.
The main difference between the two types of financing is that the external financing was generated by others (not yourself). In the case of participation (e.g. shareholders or members of a cooperative), the funds come from others, but these persons or companies are not independent of your company, but have shares in it this. So if you own a large bakery and some shareholders contribute money who are not employed by you, then this is externally financed self-financing. In the case of third-party financing, on the other hand, it means that you either cannot use the funds freely (e.g. B. earmarked reserves) or that the financier does not have a stake in your company (e. B. a bench).
