Importance of External Financing Requirements

External Financing
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External Financing
In the United States, there has been an upward move in small businesses as more people open up their businesses. Small businesses might find it challenging to mature and ascertain long-term sustainability after winning customers due to a lack of external financial support. Fear of debt, failure to understand the market, and fear of giving up equity are the leading reasons they do not seek external financing options. External financing refers to the outside sources of funds for accompanying, including investing in private individuals, selling company shares, grants, investment firms, bank loans, etc. (Frid et al., 2016).
External financing requirements are important for businesses. First, a company can use external finances to operate the business and preserve the company resources for other purposes that arise. For instance, a chance of an investment that has a higher interest rate might arise, and the business can invest its resources. Also, growth is one of the main reasons most businesses seek external funding as they can use the money in financing growth projects that the business could not fund on its own (Frid et al., 2016). An organization can use external funding to purchase large capital equipment if they need additional manufacturing space.
There are vital factors that a business should put in place when determining its external finance requirements. First, the risk is important to consider regarding what might happen if the financial commitment is not met. For instance, if a business borrows from a bank and cannot commit to the agreed deadline, or if a business borrows from friends and family members, the relationship is affected. It is important to select suitable funding to ensure that the overall risk is minimal.
The Cost of finance must also be considered and the effect it will have on the financial decisions. The aim will be to minimize the finance cost while maximizing the wealth of the owner. The organization needs to consider the impact of choosing a source of funding over the other. Control is also an important factor since more shares can lead to dilution of control amongst the shareholders (Chen, 2016).). Each investor at this point is ...