What is external financing?
This describes money a company may raise from outside its business. It can refer to equity issues, where the firms in question raise funds thanks to outside investment.
Key takeaways
-
External financing describes money companies raise from outside their business through equity issues and outside investment, contrasting with internal funding from retained profits.
-
Initial public offerings and seasoned equity offerings are types of external financing where shares are sold to institutional investors and the public.
-
Firms may pursue external financing to boost finances during challenging periods, such as when experiencing falling profits and needing to attract new investors.
-
Companies may be reluctant to pursue external financing because it includes paying transaction costs, making the process expensive for the firm.
-
IPOs can require companies to divulge sensitive information that could prove useful to their competitors, creating a strategic disadvantage.
Where have you heard about external financing?
You may have read about a firm launching an initial public offering (IPO) to raise funds. Shares are sold to institutional investors and then the public. This is a type of external financing.
What you need to know about external financing.
A firm may decide to launch an IPO or SEO to boost its finances, if for example, it has experienced falling profits. This gives new investors a chance to buy securities. However, firms may be reluctant as external financing often includes paying transaction costs, making the process expensive. An IPO may also mean the company having to divulge information that could prove useful to its competitors. The opposite concept is internal funding, which refers to money earned and retained through a firm's own profits.
Find out more about external funding.
Find out more about initial public offerings or season equity offerings with our definitions.