In the theory of

capital structure In corporate finance, capital structure refers to the mix of various forms of external funds, known as capital, used to finance a business. It consists of shareholders' equity, debt (borrowed funds), and preferred stock, and is detailed in the ...

, external financing is the phrase used to describe funds that firms obtain from outside of the firm. It is contrasted to internal financing which consists mainly of profits retained by the firm for investment. There are many kinds of external financing. The two main ones are equity issues, ( IPOs or SEOs), but trade credit is also considered external financing as are accounts payable, and

tax A tax is a mandatory financial charge or levy imposed on an individual or legal entity by a governmental organization to support government spending and public expenditures collectively or to regulate and reduce negative externalities. Tax co ...

es owed to the

government A government is the system or group of people governing an organized community, generally a State (polity), state. In the case of its broad associative definition, government normally consists of legislature, executive (government), execu ...

. External financing is generally thought to be more expensive than internal financing, because the firm often has to pay a transaction cost to obtain it. Possible ways are Peer to peer funding, Business angels,

Crowdfunding Crowdfunding is the practice of funding a project or venture by raising money from a large number of people, typically via the internet. Crowdfunding is a form of crowdsourcing and Alternative Finance, alternative finance, to fund projects "withou ...

, Bond issues or

Loan In finance, a loan is the tender of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay interest for the use of the money. The document evidencing the deb ...

General

Equity and debt financing represent the total financing of companies and other legal entities (such as local authorities). They provide information on the origin of the financing funds, which in the case of equity financing come from the shareholders or from the company itself (retention of earnings and

depreciation In accountancy, depreciation refers to two aspects of the same concept: first, an actual reduction in the fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wears, and second, the allocation i ...

and amortization) and in the case of debt financing from

creditor A creditor or lender is a party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some propert ...

s or from the company itself (recognition of provisions). If the source of financing is within the company itself, it is referred to as internal financing; otherwise, it is external financing. The limit of external financing lies in the maintenance of liquidity,Dietrich Härle, ''Finanzierungsregeln und ihre Problematik'', in: Schriftenreihe für Kreditwirtschaft und Finanzierung, Band 4, 1961, S. 34 because the debt service (loan interest and repayment) for the existing external financing burdens liquidity as expenses. Debt financing is recorded in the

balance sheet In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business ...

under borrowed capital.

References

{{Authority control Financial markets Debt

General

See also

References