I have the ATAR notes business studies book, in the external sources of finance section it has shares and private equity as an external source of finance however in the planning and implementing section it has EQUITY FINANCE: money lent INTERNALLY in exchange for ownership rights, this includes start up capital and issuing of shares.
I am very confused, is issuing of shares internal or external source of finance?
Hi Ollie!
Trust in Andrew's notes! Share capital, whether private or public via the ASX is a form of
external equity finance. This is because the business offers partial ownership to shareholders outside the business.
I understand this may be confusing because a) the partial owner is now considered a stakeholder in the business and b) equity finance such as a
rights issue is technically utilising current stakeholders to raise funds.
What is important to remember is that
internal finance is sourced directly from within the business ie
retained profits whereas
external finance involves any use of an external party or intermediary (such as the ASX) to gain funds.
Hope this helps