If an entrepreneur wants to invest in the business, the question arises: Are the finances right?? And: Can I handle the investment alone?? If the funds are not available or otherwise planned, external financing is necessary.
Whether it is the purchase of goods for an upcoming large order, the acquisition of a new tractor or the expansion of warehouse or production buildings: When it comes to financing, it must first be clarified with which funds the project will be implemented.
External and internal financing both have their advantages and disadvantages. In the following we show the opportunities and risks.
Internal financing
If an entrepreneur decides to implement a project by means of internal financing, he uses, for example, profits generated by his own company or surpluses left over from the positive cash flow. But factoring, a financing solution, can also be considered as internal financing, as it involves the ongoing transfer of monetary receivables to the factoring provider, who in turn provides the company with immediate liquidity.
The advantage is obvious: if financed from own funds, the company is flexible and independent from credit institutions. It can act completely autonomously and solve financing projects independently. Furthermore, no additional costs, such as interest, are incurred.
However, in most cases, internal financing is only possible to a limited extent. Particularly in the case of large innovation projects, medium-sized companies are dependent on external financing. But even smaller projects, such as the purchase of a new company car, are more likely to lend themselves to outside financing (for example, through leasing).
External financing
With external financing, the necessary funds come, as the name suggests, from outside the company. This includes, for example, classic loans from a bank. But also equity capital of the entrepreneur belongs to external financing, if he injects it into the company from the outside. Basically, it can be said that external financing always involves capital from third parties. Strictly speaking, this also includes money that comes from shareholders, for example.
The advantage of external financing: If an entrepreneur uses capital from outside for planned, large projects, the company's own capital is not burdened and offers additional leeway for investments that become necessary at short notice, such as defective machines, repairs or unforeseeable circumstances.
Tip: Particularly when medium-sized companies are doing well financially, decision-makers should consider implementing projects with the help of external financing. Those who finance in good times usually get better conditions – especially in times of low interest rates.
Who fears a dependence on financing partners by an increased external financing, can be unconcerned, if he sets on an appropriate financing mix. Online platforms such as COMPEON help to reduce dependencies in this case: Fast, digital and uncomplicated. Here, by submitting a financing request, entrepreneurs gain access to more than 250 financing providers, are free to decide with whom to implement the project, and thus maintain a broad financing mix.
Conclusion: It's all in the mix
In conclusion, it can be said that entrepreneurs should maintain a good balance between internal and external financing. If SMEs use external financing instruments such as loans, they keep sufficient capital in the company to be able to respond to short-term events. At the same time, they benefit from the current favorable interest rate situation and can finance at best conditions.