What is financing and what are its sources of origin

What is financing and what are its sources of formation with subsequent distribution?

general information

When an entrepreneur organizes his own business, he needs to know: over time, he will need money again. 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. This is the name of the replenishment of funds. Conventionally, two sources of funding can be identified : external and internal. Each of them has its own specifics.

Internal sources of financing

What does it concern them? The net profit of the plant, enterprises, manufactories and depreciation charges are those internal sources, from which it is possible to take the potential for new development. They are most typical for small business. The main sources of funding are the money they have received. The fact is that someone outside of it rarely when ready to invest their own funds in a small company. But if it successfully develops and has a high level of profitability (which is quite typical), then there may be exceptions. Expansion of production is launched and at the expense of its own funds, but in such cases the process is very slow. Because for this you have to repeatedly go through the cycle of creating and selling goods. An important point is the use of depreciation. Large enterprises use not only normal, but also accelerated. This is possible due to the use of technology with high productivity, which does not lead to an increase in prices. That's what funding is and what its sources are. At the heart of any activity is the determining factor. But let's say that the company wants to follow the path of forced development.

External sources of financing

If necessary, or plans to expand production at an accelerated pace, an enterprise can use the funds that other entities will provide. There are several options for development. The most popular are opening a credit line in a bank or looking for an investor. Each of these ways has its drawbacks. Thus, the use of banking services usually results in significant expenditures in the form of interest payments and the loan body. In addition,% of the loan often exceeds the level of profitability, which creates additional problems. If you turn to the investor, you can get a loan on more favorable terms, but in return it is required, as a rule, to give up a share in the business. And despite the benefits, the bank can still pay the money, and then all the profits will go to the owner. But in the case of the investor, the only option is to redeem it. That's what financing is and what are its external sources.