Internal and external finance of a business

[Holicent]

Internal finance is an important part of the overall business. It is a crucial factor for a company's success, but it is also very easy to neglect. While internal finance may seem like just another expense, it is often overlooked in favor of external finance.

Internal finance includes all expenses that are part of a company's operations, such as payroll and maintenance costs, rent or mortgage payments and other fixed expenses such as advertising and research and development (R&D).

Internal finance is the cost of the raw materials and labor used in the production process. The internal finance cost includes wages, salaries, equipment depreciation and maintenance costs.

External finance includes those expenses that are not directly related to the company's operations but that have an effect on its bottom line. These include interest payments on loans, capital expenses such as equipment purchases, taxes and dividends paid out to shareholders.

External finance can also be the cost of money borrowed to finance a business's capital needs. External finance can be obtained through borrowing from financial institutions or other companies.

 

[Jasz]

External finance is a major component of the business. Without it, a company cannot continue to operate and may even be forced to shut down. External financing is provided by lenders who are interested in earning a profit on their investment.

The primary function of external finance is to provide working capital, funds that allow a company to meet its obligations for goods and services as they come due. This includes paying for raw materials, labor costs, rent and other expenses. For example, if a company needs to buy materials for production but does not have enough cash on hand to pay for them at market prices, it will turn to an outside source for help. Financial institutions such as banks are often willing to lend money against collateral such as inventory or equipment in order to facilitate this type of transaction.

The most common form of external financing involves borrowing from financial institutions such as banks or other lenders. Companies may also obtain loans from private investors (individuals or firms). In either case, these loans are often secured by specific types of assets (e.g., receivables generated from customer sales) or other forms of collateral such as stocks and bonds held by the lender.