In the theory of

capital structure In corporate finance, capital structure refers to the mix of various forms of external funds, known as capital, used to finance a business. It consists of shareholders' equity, debt (borrowed funds), and preferred stock, and is detailed in the ...

, external financing is the phrase used to describe

funds Funding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm uses ...

that firms obtain from outside of the firm. It is contrasted to

internal financing In the theory of capital structure, internal financing is the process of a firm using its profits or assets as a source of capital to fund a new project or investment. Internal sources of finance contrast with external sources of finance. The m ...

which consists mainly of profits retained by the firm for investment. There are many kinds of external financing. The two main ones are equity issues, ( IPOs or SEOs), but trade credit is also considered external financing as are

accounts payable Accounts payable (AP) is money owed by a business to its suppliers shown as a liability on a company's balance sheet. It is distinct from notes payable liabilities, which are debts created by formal legal instrument documents. An accounts payable ...

, and taxes owed to the

government A government is the system or group of people governing an organized community, generally a state. In the case of its broad associative definition, government normally consists of legislature, executive, and judiciary. Government ...

. External financing is generally thought to be more expensive than

, because the firm often has to pay a

transaction cost In economics and related disciplines, a transaction cost is a cost in making any economic trade when participating in a market. Oliver E. Williamson defines transaction costs as the costs of running an economic system of companies, and unlike pro ...

to obtain it. Possible ways are "Peer to peer funding", "Business angels", "Crowfunding" or "Loans".

See also