Internal and External Sources of Funds
Introduction
Operations of any business entity rely on its financial situation. On many occasions, business entities engage in various activities that require finances for execution. The funds can be accessed through internal and external sources. This paper defines and differentiates between internal and external sources of finance for a business corporation. It also highlights various examples of both internal and external sources of funds and their brief description. In the final stages, the paper discusses the preferred source of funds for a corporation between internal and external sources of finance.
Internal Sources of Funds
These are sources of finances that are obtained from the assets of the business or its activities. A business can only be able to access internal funds if the business has sufficient funds at its disposal to allocate some to use by the company. Internal sources of funds include retained profit, reduced working capital and sales of assets. A company has to be profitable in order to retain profits after paying all its costs. Retained profits offer long term funds as long as the business is profitable (Block, & Hirt, p. 116).
A firm can also access funds internally by reducing the stock level through improved stock control. The firm may also improve their credit control and time period of collecting debts, and delay making payments to creditors hence improving the level of funds in the firm. Selling assets provide funds for business operations depending on their values (Kim & Kim, p. 168). The firm may sell surplus or existing assets in order to raise some capital to be used in financing business activities.
In the case of Multinational Corporations, a corporation can access funds in form of loans from sister subsidiaries and parent company. The parent company supplies funds in form of equity contributions, loans, and guarantees. In addition, intersubsidiary credit expands the sources of internal financing. For instance, a subsidiary in the US has idle funds, it may lend the funds to a sister subsidiary in Britain (Block, & Hirt, p. 200).
External Sources of Funds
Are sources of finance outside the business including shares, loans, overdraft, and hire purchase, credit from supplies, grants, venture capital, and factoring? Shareholders provide funds but they also make demand cash payments in form of dividends. The corporation sales company shares to other companies or individual and use the capital generated to finance its activities. In exchange for funds, the company gives shareholders ownership rights equivalent to the amount of money raised (Kim & Kim, p. 174). Shareholders are arguably the largest source of internal funds for the company. Share capital is advantageous because it is irredeemable meaning that it can not be returned.
Many businesses organizations make purchases on credit. The company does not make payments at the time of purchase but acquires the equipment on condition that it will make future payments. They use expected future returns to pay for the equipment as they use it. This creates finance because creditors are willing to offer credit expecting that the business will make a profit, hence a form of loan to the business.
Corporations secure debenture loans with fixed or variable interest rates in order to finance its activities (Block & Hirt, p.1 43). Loan payments are made in installments and the company is required to provide collateral security. The company may also secure a bank overdraft to help the business meet short term financial shortages. Overdraft involves withdrawing money from the account in amounts exceeding the minimum balance. An overdraft is cheaper than a loan because interest is calculated daily. Banks are the major source of loans and overdrafts. `
Firm’s’ majority sources of funds
Facts on the surveys that have been conducted regarding the sources of funding of many firms have been aimed at the economical‐market motives for under‐investment in many sectors of the industry that persevere even in the nonexistence of externality persuaded under‐investment. The facts that can be asserted towards concerning the funding of the firms are miniature and fresh innovative firms are familiar with high expenses of resource that are merely partly eased by the existence of investment capital.
Another contributing fact is the proof of high expenses of Resource and development capital for huge firms that are mutual, even though these businesses do favor internal resources for financing these ventures. Thirdly, there are restrictions to invest the capital as a resolution to the financial support gap, particularly in nations where public fair play markets are not extremely advanced. The statement therefore concludes the fact that firms usually rely on internal funds through investment to funs their operations. Finally, lawmaking sources, resources and subsidy policies utilizing quasi-investigational techniques is defensible. The amount to which businesses have really relied on external financing over the past times has been discoursed for years.
Conclusion
Trade historians have the similar opinions that near the beginning of the twentieth century, investors exercised enormous authority inside the business society. Investment financiers participated in a significant role in commercial formations and amalgamations since of their mid position in the issuance and transaction of fresh securities. As the main providers of resources in an era of intense opposition and rising concentration, venture banks appropriated a main share of the advertiser’s proceeds for themselves, chosen their individual representatives to company’s boards, and put forth manipulation over commercial policy. This era is frequently referred to as the age of finance resources.
Works cited
Block, S & Hirt, G. Foundations of Financial Management. New York: McGraw Hill/Irwin, 2008.
Kim, S & Kim, S. Global Corporate Finance: Text and Cases. London: Wiley-Blackwell, 2006.
