What is financing and what are its sources of formation with the subsequent distribution?
general information
When an entrepreneur organizes his own business, he needs to know: over time, he will again need money. Sooner or later - it does not matter. The fact is that funds will be needed. Therefore, it is important to know what financing is and what its sources are. So called replenishment of funds. Conventionally, two
sources of financing can be distinguished
: external and internal. Each of them has its own specifics.
Internal sources of financing
What concerns them? The net profit of the plant, enterprise, manufactory and depreciation deductions are those internal sources from which we can take the potential for new development. They are most typical for small businesses. The main sources of financing are the money they received. The fact is that someone outside of him is rarely willing to invest his own funds in a small enterprise. But if it is developing successfully and has a high level of profitability (which is quite typical), then there may be exceptions. They also start expanding production at their own expense, but in such cases the process is very slow. For this, you have to repeatedly go through the cycle of creation and sale of goods. An important point is the use of depreciation. Large enterprises use not only ordinary, but also accelerated. This is possible thanks to the use of high productivity technology, which does not lead to higher prices. This is what financing is and what are its sources. At the heart of any activity is a determining factor. But let's say that the company wants to follow the path of accelerated development.
External sources of financing
If necessary, or plans to expand production at an accelerated pace, the company can use the funds that other entities will provide. There are several development options. The most popular are opening a credit line at a bank or finding an investor. Each of these paths has its drawbacks. So, the use of bank services usually results in significant expenses in the form of interest payments and a loan body. In addition, the% of the loan often exceeds the level of profitability, which creates additional problems. If you turn to an investor, you can get a loan on more favorable terms, but instead of this, you usually need to give up a share in the business. And despite the benefits, the bank can still pay money, and then all the profits will go to the owner. But in the case of an investor, the only option is to buy back part of it. This is what financing is and what are its sources of external type.