External sources of finance come from outside the business. Subsidies belong to external sources of finance. When businesses need to use the money in the long term (more than five years), this creates the need for long-term finance.
The amount of long-term finance needed for buying Fixed Assets, or Non-Current Assets, with a relatively low value such as vehicles will be small. While the amount of long-term finance needed for buying Fixed Assets, or Non-Current Assets, with a relatively high value such as new machinery for the assembly line will be large.
Subsidies
Subsidies are sums of money given by the government to producers of commodities which are widely used by the majority of the society. The government will offer subsidies for essential goods and services such as food, energy, medications, education services, transportation, etc.
This government incentive in the form of financial aid is granted to a business, or even the whole industry, to keep commodity prices low, or maintain them unchanged.
Thanks to subsidies from the state, the producers will not increase prices. It is because with subsidies, the producers will be able to lower the cost of production. This will help them to maintain their profit margins without charging customers higher prices at the same time.
The profit is made up by receiving the financial support of the government subsidy. Otherwise, there would be no profit, if prices remain unchanged.
Example 1: Farming subsidies are often granted to farmers, so that they can make their profit and the food prices can be stabilized at the same time.
So, subsidies are given out not to maximize the producer’s profits. But, to provide extended benefits to the whole society. Higher prices may negatively influence the customers. Or, go against the public interest.
