Final answer:
The four main types of long term external financing are early-stage financing, reinvestment of profits, debt financing, and equity financing. These methods are crucial for businesses looking to finance large projects or expansions and come with varying levels of risk and control over the company.
Step-by-step explanation:
The four types of long term external financing that firms use to pay for their projects are:
- Early-stage financing: Funding provided by angel investors, venture capitalists, or friends and family to start-ups and small businesses demonstrating high growth potential.
- Reinvestment of profits: Companies can finance their expansions by reinvesting the profits they have earned back into the business.
- Debt financing: Acquiring funds through borrowing from banks or issuing bonds. This method requires periodic interest payments and the eventual repayment of the principal amount borrowed.
- Equity financing: This involves selling company stock to raise funds. Shareholders then have a claim to a portion of the company's assets and earnings.
Each method of external financing carries its own risks and benefits, and the choice depends on the company's goals, the amount of money needed, the company's ability to repay, and its willingness to share ownership and profits. Understanding the mechanics and implications of each type is crucial for a business's financial strategy.