MBA 6081
Unit V Essay – External Financing
Columbia Southern University
MBA 6081 - Corporate Finance
External Financing
There are two ways to fund a project: internal and external funding. Internal, as the name
implies, is using cash on hand. External funding is sourced from outside the company and can
include loans, private investors, grants or selling shares in the company. This essay will discuss
the requirements associated with external financing and delve into the conflict of interest that can
arise between a company's management and stockholders/shareholders.
Importance of External Financing
In the days before electricity, people pumped water from wells using hand activated
pumps. The material of choice for the one-way flapper valve was leather; it was cheap, durable
and readily accessible. However, the leather had a fatal flaw, when allowed to dry it would not
form a seal and no matter how aggressively it was pumped, would not form a seal. The only way
to get the valve to work was to prime the pump with water from an external source. This analogy
illustrates why some companies with low cash assets need the boost from external financing;
they can’t do it by themselves. If a company lacks savings, revenues or can’t liquidate enough
assets, external financing is a different way to fund growth. External financing is important
because it enables financing growth projects that wouldn’t be possible on its own… like priming
the pump.
Key Factors Regarding External Financing
External funding is a strategic decision companies make that involves evaluating the
initial cost verses the potential for return on investment. Key decisions such as how much cash is
needed, and the complexity of the investment, will form their strategic growth plan. It will
Unit V Essay – External Financing
Columbia Southern University
MBA 6081 - Corporate Finance
External Financing
There are two ways to fund a project: internal and external funding. Internal, as the name
implies, is using cash on hand. External funding is sourced from outside the company and can
include loans, private investors, grants or selling shares in the company. This essay will discuss
the requirements associated with external financing and delve into the conflict of interest that can
arise between a company's management and stockholders/shareholders.
Importance of External Financing
In the days before electricity, people pumped water from wells using hand activated
pumps. The material of choice for the one-way flapper valve was leather; it was cheap, durable
and readily accessible. However, the leather had a fatal flaw, when allowed to dry it would not
form a seal and no matter how aggressively it was pumped, would not form a seal. The only way
to get the valve to work was to prime the pump with water from an external source. This analogy
illustrates why some companies with low cash assets need the boost from external financing;
they can’t do it by themselves. If a company lacks savings, revenues or can’t liquidate enough
assets, external financing is a different way to fund growth. External financing is important
because it enables financing growth projects that wouldn’t be possible on its own… like priming
the pump.
Key Factors Regarding External Financing
External funding is a strategic decision companies make that involves evaluating the
initial cost verses the potential for return on investment. Key decisions such as how much cash is
needed, and the complexity of the investment, will form their strategic growth plan. It will
