External Financing: Its Benefits and Drawbacks Ipass
Any type of business investment obtained from outside the company is referred to as external financing. External finance might take the form of bank loans, investments from private persons or investment firms, grants, or the sale of company stock. You must first grasp the benefits and drawbacks of external funding before pursuing it a Need Money Urgently.
Advantage: You’ll be able to conserve your resources.
External money has the benefit of allowing you to employ internal financial resources for other reasons. If you can discover a higher-interest-rate investment than the bank loan your firm just received, it makes sense to put your money into that investment rather than using external financing for business operations. You can also set aside internal financial resources for cash payments to vendors, which can increase your business’s credit score.
Growth is an advantage.
Companies can use external cash to fund growth projects that they wouldn’t be able to fund on their own. If your company is growing to the point where you need more manufacturing space to keep up with demand, for example, external finance can help you secure the money you need to develop the extension. External finance can also be utilized to make major capital equipment purchases that the firm couldn’t afford on its own to help it grow.
Advantage: Expertise and Advice
Expert guidance is frequently available from organizations prepared to finance your firm. Your banker, for example, has likely backed a number of other small businesses and may be able to advise you on how to avoid the traps that have plagued others. An investor in your technological start-up is likely to have technology skills of his own, and even if he doesn’t, he may be able to point you in the right direction.
Ownership is a disadvantage.
Some external funding sources, such as investors and shareholders, require you to give up a portion of your company’s ownership in exchange for the funds. You might get the big cash infusion you need to launch your new product, but part of the finance deal stipulates that the investor has a say in corporate decisions. This may jeopardize the vision you had for your firm when you first started it.
Interest is a disadvantage.
A return on investment is required by external financing sources. Interest will be added to a business loan, and investors will demand a rate of return in the investment agreement. Interest increases the entire cost of the investment, making your external money a bigger financial burden than you anticipated.
It’s a Lot of Work, which is a disadvantage.
Obtaining external funding can be a full-time job in and of itself. You’re tasked with locating possible funding sources, creating a polished business plan, practicing a presentation, and calling dozens of people to set up — or attempt to set up – a face-to-face meeting. All of these duties need a significant amount of time and resources. None of them guarantee that you will receive the finances you require.