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Business financing consists of two different primary forms, internal and external. These refer to the sources of income used to acquire the capital necessary to start, help or expand a business. This article will briefly look at the advantages of the latter form, as well as external loan financing disadvantages.
Business financing from an external source simply means that money is coming in from somewhere that is not within the company itself (that is, not from the profits the company is making, which would be considered internal financing). There are some obvious benefits for getting money from outside sources. First of all, it is often the only way to get a business started, or to expand it in a direction that it needs to go. Think of how many businesses would not have existed, would it not have been for loans and capital coming in from other sources.
There are, of course, external loan financing disadvantages. Businesses need to forfeit some of their ownership rights in order to obtain external financing, and depending on the amount of the loan they are receiving, the level of ownership and control may be substantial. Venture capitalists will often gain an overwhelmingly significant say in what happens in the business and will almost certainly guarantee it to themselves through contract.
Another one of the big external loan financing disadvantages: businesses gaining external capital by going public will often lose control of themselves through acquisitions of large shareholders, and will be subject to the control of their larger financiers.
However, these terms are extremely generalized, and it is very unlikely that any advice you take on whether to or to not pursue external financing should be taken at face value; the individual variables of the situation are of paramount importance.
