## External Sources of Finance [block_0] 1. When your business needs funds to expand, purchase equipment, or manage cash flow. 2. Where do you turn if internal resources aren't enough? 3. This is where **external sources of finance** come into play. ## Share Capital: Selling Ownership in the Business [block_4] **Share capital** is a form of business finance where companies raise funds by selling shares, which represent ownership in the company. Each share is a **certificate of partial ownership.** 1. **Shareholders** become part-owners and may receive **dividends** as a return on their investment. 2. This is often referred to as having "equity" in the company. ### When Is Share Capital Suitable? [block_7] 1. **Long-term investments**: Ideal for funding major projects like expansion or research and development. 2. **Limited companies**: Only available to private or public limited companies, not sole traders or partnerships. ### Types of Companies Using Share Capital [8b8a1fc5807a] 1. **Privately Held Companies**: Shares are not traded publicly, ownership is typically held by a small group. 2. **Publicly Held Companies**: Shares are traded on stock exchanges, allowing wider access to investors. [{"_key":"6b79b3a0f24b","_type":"block","asset":null,"children":[{"_key":"565625bab1e00","_type":"span","marks":[],"text":"Share capital is not \"free money.\" "}],"level":1,"listItem":"bullet","markDefs":[],"style":"normal"},{"_key":"e46ef500132c","_type":"block","asset":null,"children":[{"_key":"b177fc5afa70","_type":"span","marks":[],"text":"In reality, shareholders expect a return on their investment, often through dividends or stock appreciation."}],"level":1,"listItem":"bullet","markDefs":[],"style":"normal"}] [{"_key":"block_12","_type":"block","asset":null,"children":[{"_key":"SKegYEUhosFtAcmMhiL1Lh","_type":"span","markDefs":[],"marks":[],"text":"A tech startup raises "},{"_key":"9b98c6e54576","_type":"span","marks":["strong"],"text":"€"},{"_key":"18edc3d2c3da","_type":"span","markDefs":[],"marks":[],"text":"1 million by selling 20% of its shares to investors. This capital funds product development and marketing."}],"markDefs":[],"style":"normal"}] ### Pros and Cons of Share Capital [block_13] | Advantages | Disadvantages | | --- | --- | | No repayment or interest obligations | Dilution of ownership and control | | Large sums can be raised | Share issuance can be costly and time-consuming | | Dividends are flexible and not mandatory | Public companies face increased scrutiny and regulation | ![](https://cdn.sanity.io/images/w7j7fz60/production/d84e47bea9ee9b4237da245987bd7cd1f3cffebb-948x533.webp) ## Loan Capital: Borrowing with Interest [block_18] **Loan capital** refers to funds borrowed from banks or financial institutions over a medium to long term, repaid over time with interest. 1. Common forms include **bank loans**, **mortgages**, and **debentures**. 2. These types of financing are essential for businesses requiring significant amounts of money for investments or operational growth. ### 1. Bank Loans [block_20] A **bank loan** is a sum of money provided by a bank to a business, which is repaid with **interest** over an agreed period. 1. **Bank loans** are typically repaid over terms ranging from **2 to 20 years**, with regular repayment schedules. 2. The **interest rate** on a bank loan can be either **fixed** (unchanging) or **variable** (fluctuating with market conditions). 3. Banks often require **collateral**, such as property or equipment, to secure the loan. 4. This collateral can be seized if the borrower defaults on payments. 5. Bank loans are usually easier to secure for businesses with a **strong credit history** and financial stability. 6. Once agreed, the repayment terms are relatively **inflexible**, requiring businesses to commit to regular payments. [{"_key":"5095028ae52b","_type":"block","asset":null,"children":[{"_key":"523d33828bca0","_type":"span","marks":[],"text":"A software company takes out a "},{"_key":"523d33828bca1","_type":"span","marks":["strong"],"text":"10-year loan"},{"_key":"523d33828bca2","_type":"span","marks":[],"text":" to purchase servers, repaying the loan at a "},{"_key":"523d33828bca3","_type":"span","marks":["strong"],"text":"fixed interest rate of 6%"},{"_key":"523d33828bca4","_type":"span","marks":[],"text":". The loan is secured against office equipment."}],"markDefs":[],"style":"normal"},{"_key":"4d3b1fe04777","_type":"block","asset":null,"children":[{"_key":"3832434a373c0","_type":"span","marks":[],"text":""}],"markDefs":[],"style":"h4"}] ### 2. Mortgages [d145c5f758fa] A **mortgage** is a **long-term loan** designed specifically for purchasing property, where the property itself serves as **collateral**. 1. Mortgages can last for up to **50 years**, making them ideal for financing** large assets** such as land or buildings. 2. The **interest rate** can be **fixed** or **variable**, allowing businesses to select repayment terms that suit their financial stability. 3. The **purchased property** acts as security, which means it can be seized if the borrower fails to make payments. 4. **Remortgaging** allows businesses to refinance their property to release additional funds, which can be particularly helpful for expanding operations. 5. Mortgages are often used by businesses that want to **own fixed assets** instead of renting. [{"_key":"8d1ade093b30","_type":"block","asset":null,"children":[{"_key":"5402ee772edb0","_type":"span","marks":[],"text":"A retail business takes out a "},{"_key":"5402ee772edb1","_type":"span","marks":["strong"],"text":"25-year mortgage"},{"_key":"5402ee772edb2","_type":"span","marks":[],"text":" to buy a storefront, with a "},{"_key":"5402ee772edb3","_type":"span","marks":["strong"],"text":"fixed interest rate of 4%"},{"_key":"5402ee772edb4","_type":"span","marks":[],"text":". Monthly repayments are secured against the property."}],"markDefs":[],"style":"normal"}] ### 3. Debenture [a7f8f0dade9e] A **debenture** is a **long-term loan** issued by businesses to raise capital, often with fixed interest payments over a specific term. 1. **Interest rates** on debentures are fixed, providing businesses and lenders with predictable financial terms. 2. The repayment term for a debenture usually ranges from **10 to 15 years**, although some debentures are **irredeemable** (no repayment date). 3. Debentures are secured using **non-current assets** like property or equipment as collateral. 4. Unlike equity financing, debentures do not give lenders any **ownership rights** in the business, meaning no dilution of control. 5. Debentures are often used by businesses that need **large-scale, long-term financing** without offering shares in the company. ### Pros and Cons of Loan Capital [block_27] | Advantages | Disadvantages | | --- | --- | | Predictable repayment schedule | Interest payments increase costs | | No loss of ownership or control | Collateral may be required | | Suitable for medium- to long-term needs | Inflexible repayment terms | | Onwer's funds are at lesser risk | Lesser profits due to interest payments | [{"_key":"block_31","_type":"block","asset":null,"children":[{"_key":"SKegYEUhosFtAcmMhiL1uT","_type":"span","markDefs":[],"marks":[],"text":"When interest rates are low, loan capital can be an attractive option for financing large projects."}],"markDefs":[],"style":"normal"}] ## Overdrafts: Flexible Short-Term Borrowing [block_32] An **overdraft** allows businesses to withdraw more money than is available in their bank account, up to an agreed limit. ### When Are Overdrafts Useful? [block_34] 1. **Managing cash flow**: Ideal for covering **short-term** expenses like **payroll** or **inventory**. 2. **Flexibility**: Borrow only what you need, when you need it. [{"_key":"block_39","_type":"block","asset":null,"children":[{"_key":"SKegYEUhosFtAcmMhiL1xd","_type":"span","markDefs":[],"marks":[],"text":"A retail store uses an overdraft to pay suppliers during a slow sales month, repaying it when revenue increases."}],"markDefs":[],"style":"normal"}] ### Pros and Cons of Overdrafts [block_40] | Advantages | Disadvantages | | --- | --- | | Highly flexible and easy to arrange | High interest rates compared to loans | | Interest is charged only on the amount used | Banks can demand immediate repayment | | No long-term commitment | Not suitable for large or long-term needs | [{"_key":"block_44","_type":"block","asset":null,"children":[{"_key":"SKegYEUhosFtAcmMhiL2DR","_type":"span","markDefs":[],"marks":[],"text":"Overdrafts are "},{"_key":"e7f25f6ea09e","_type":"span","markDefs":[],"marks":["strong"],"text":"not"},{"_key":"e699227ae6b4","_type":"span","markDefs":[],"marks":[],"text":" a substitute for long-term financing. "}],"level":1,"listItem":"bullet","markDefs":[],"style":"normal"},{"_key":"23c0dc98222f","_type":"block","asset":null,"children":[{"_key":"cda7924b7b69","_type":"span","markDefs":[],"marks":[],"text":"Relying on them for extended periods can be "},{"_key":"09710b90017b","_type":"span","markDefs":[],"marks":["strong"],"text":"costly"},{"_key":"772e08ea726e","_type":"span","markDefs":[],"marks":[],"text":"."}],"level":1,"listItem":"bullet","markDefs":[],"style":"normal"}] ## Trade Credit: Delayed Payment to Suppliers [block_45] **Trade credit** allows businesses to delay payment for goods or services, typically for 30 to 90 days. ### Benefits of Trade Credit [block_47] 1. **Improves liquidity**: Frees up cash for other expenses. 2. **Interest-free**: Unlike loans or overdrafts, **no** interest is charged. [{"_key":"block_52","_type":"block","asset":null,"children":[{"_key":"SKegYEUhosFtAcmMhiL2Gb","_type":"span","markDefs":[],"marks":[],"text":"A bakery receives flour from a supplier with a 60-day payment term, allowing it to sell products before paying for the raw materials."}],"markDefs":[],"style":"normal"}] ### Pros and Cons of Trade Credit [block_53] | Advantages | Disadvantages | | --- | --- | | Interest-free short-term financing | Late payments may incur penalties | | Strengthens supplier relationships | Not available to all businesses, especially startups | | Improves cash flow management | Over-reliance can strain supplier relationships | [{"_key":"block_57","_type":"block","asset":null,"children":[{"_key":"SKegYEUhosFtAcmMhiL2WP","_type":"span","markDefs":[],"marks":[],"text":"Negotiate favorable trade credit terms with suppliers to enhance your business's cash flow."}],"markDefs":[],"style":"normal"}] ## Crowdfunding: A Modern Source of Business Finance [block_58] **Crowdfunding** involves raising small amounts of money from a large number of individuals, typically via online platforms. ### Types of Crowdfunding [block_60] 1. **Donation-based**: Supporters contribute without expecting a return. 2. **Reward-based**: Contributors receive perks or products. 3. **Equity-based**: Investors receive shares in the business. [{"_key":"block_66","_type":"block","asset":null,"children":[{"_key":"SKegYEUhosFtAcmMhiL2ZZ","_type":"span","markDefs":[],"marks":[],"text":"A startup raises $50,000 on Kickstarter to launch a new gadget, offering early access to the product as a reward."}],"markDefs":[],"style":"normal"}] ### Why Crowdfunding Has Grown in Popularity [7b3106344fe4] 1. **Bank Lending Challenges: ** 1. Following the **financial crisis** of 2007–2009, banks became **more cautious**, making it harder for **small and medium-sized** enterprises (SMEs) to **secure loans**. 2. **Low Interest Rates for Savers: ** 1. Interest rates on traditional savings accounts have often been **lower** than **inflation**. 2. This has led savers to look for alternative ways to **grow their money**. 3. **Internet Platforms Bridging the Gap: ** 1. Entrepreneurs have developed **online platforms** that connect businesses seeking funding with individuals willing to lend or invest. 2. These platforms **simplify** the process for both parties. ### Pros and Cons of Crowdfunding [block_67] | Advantages | Disadvantages | | --- | --- | | Access to a wide pool of investors | Campaigns require significant marketing effort | | Validates business ideas through public interest | No guarantee of reaching funding goals | | Builds a community of supporters | Platforms may charge fees | [{"_key":"block_71","_type":"block","asset":null,"children":[{"_key":"SKegYEUhosFtAcmMhiL2pN","_type":"span","markDefs":[],"marks":[],"text":"Crowdfunding is not a quick fix. Successful campaigns require careful planning and promotion."}],"markDefs":[],"style":"normal"}] [{"_key":"99a968c54622","_type":"block","asset":null,"children":[{"_key":"8005e5d35afc0","_type":"span","marks":[],"text":"Successful campaigns often invest in high-quality pitches, videos, and marketing efforts to appeal to supporters."}],"markDefs":[],"style":"normal"}] ## Leasing: Renting Instead of Buying [block_72] **Leasing** allows businesses to use assets like equipment or vehicles without purchasing them outright. ### Why Choose Leasing? [block_74] 1. **Preserves capital**: No large upfront payment required. 2. **Access to latest technology**: Easily upgrade assets at the end of the lease term. [{"_key":"block_79","_type":"block","asset":null,"children":[{"_key":"SKegYEUhosFtAcmMhiL2sX","_type":"span","markDefs":[],"marks":[],"text":"A logistics company leases delivery trucks, paying a monthly fee instead of buying them outright."}],"markDefs":[],"style":"normal"}] ### Pros and Cons of Leasing [block_80] | Advantages | Disadvantages | | --- | --- | | Conserves cash for other uses | The business never owns the asset | | Regular upgrades to newer equipment | Total cost may exceed purchase price | | Predictable monthly payments | Long-term contracts can be inflexible | | Assets worth millions can be used by paying a few thousand | The legal ownership remains with the leasor hence no changes can be made without consent | [{"_key":"block_84","_type":"block","asset":null,"children":[{"_key":"SKegYEUhosFtAcmMhiL38L","_type":"span","markDefs":[],"marks":[],"text":"Leasing is ideal for "},{"_key":"3d90ae61a6bc","_type":"span","markDefs":[],"marks":["strong"],"text":"rapidly depreciating"},{"_key":"ea16ff601430","_type":"span","markDefs":[],"marks":[],"text":" assets like "},{"_key":"66b45ce9eb77","_type":"span","markDefs":[],"marks":["strong"],"text":"technology"},{"_key":"16ad84a6814d","_type":"span","markDefs":[],"marks":[],"text":" or "},{"_key":"35a0200f29d4","_type":"span","markDefs":[],"marks":["strong"],"text":"vehicles"},{"_key":"54f0082959eb","_type":"span","markDefs":[],"marks":[],"text":"."}],"markDefs":[],"style":"normal"}] ## Microfinance Providers: Small Loans for Big Impact [block_85] **Microfinance** provides small loans and financial services to entrepreneurs in developing regions. ### Why Microfinance Matters [block_87] 1. **Empowers small businesses**: Provides capital to those **without access** to **traditional banking**. 2. **Promotes economic development**: Supports entrepreneurship in **low-income** communities. [{"_key":"block_92","_type":"block","asset":null,"children":[{"_key":"SKegYEUhosFtAcmMhiL3BV","_type":"span","markDefs":[],"marks":[],"text":"A microfinance institution lends "},{"_key":"276149f5ef8a","_type":"span","marks":["strong"],"text":"€"},{"_key":"6f5ff0564d9c","_type":"span","markDefs":[],"marks":[],"text":"500 to a farmer in Kenya to purchase seeds and tools, boosting agricultural productivity."}],"markDefs":[],"style":"normal"}] ### Pros and Cons of Microfinance [block_93] | Advantages | Disadvantages | | --- | --- | | Accessible to low-income entrepreneurs | Loan amounts are typically small | | Encourages financial inclusion | Interest rates may be higher than traditional banks | | Supports community development | Limited availability in some regions | [{"_key":"block_97","_type":"block","asset":null,"children":[{"_key":"SKegYEUhosFtAcmMhiL3RJ","_type":"span","markDefs":[],"marks":[],"text":"Microfinance is not limited to loans, it often includes savings accounts, insurance, and money transfer services."}],"markDefs":[],"style":"normal"}] ## Business Angels: Investing More Than Money [block_98] **Business angels** are wealthy individuals who invest personal funds in exchange for equity or a share of future profits. ### What Do Business Angels Offer? [block_100] 1. **Capital**: Investments typically range from **€**15,000 to **€**750,000. 2. **Mentorship**: Angels often provide guidance and industry expertise. [{"_key":"block_105","_type":"block","asset":null,"children":[{"_key":"SKegYEUhosFtAcmMhiL3UT","_type":"span","markDefs":[],"marks":[],"text":"A business angel invests "},{"_key":"e6a167cfcea7","_type":"span","marks":["strong"],"text":"€"},{"_key":"8d1003f98c21","_type":"span","markDefs":[],"marks":[],"text":"100,000 in a food delivery startup, offering strategic advice to help it scale."}],"markDefs":[],"style":"normal"}] ### Pros and Cons of Business Angels [block_106] | Advantages | Disadvantages | | --- | --- | | Combines funding with valuable expertise | Entrepreneurs may lose some control | | Suitable for high-risk, high-reward ventures | Finding the right angel can be challenging | | Flexible investment terms | Angels may expect significant equity in return | [{"_key":"block_110","_type":"block","asset":null,"children":[{"_key":"f40fc451c566","_type":"span","markDefs":[],"marks":[],"text":"Don't confuse business angels with venture capitalists. "}],"level":1,"listItem":"bullet","markDefs":[],"style":"normal"},{"_key":"44a767ce197a","_type":"block","asset":null,"children":[{"_key":"a1f54189d277","_type":"span","markDefs":[],"marks":[],"text":"Angels invest "},{"_key":"d2270060773c","_type":"span","markDefs":[],"marks":["strong"],"text":"personal funds"},{"_key":"545d006dfe07","_type":"span","markDefs":[],"marks":[],"text":", while venture capitalists manage "},{"_key":"2079d2fa74ab","_type":"span","markDefs":[],"marks":["strong"],"text":"pooled funds "},{"_key":"b0eab2007bf7","_type":"span","markDefs":[],"marks":[],"text":"from multiple investors. "}],"level":1,"listItem":"bullet","markDefs":[],"style":"normal"}] ## Venture Capital: A Strategic Source of Business Finance [27b6fa969672] **Venture capital** is a form of funding provided to small and medium-sized businesses that are often considered high-risk but have significant growth potential. 1. Venture capital focuses on businesses that may face **challenges** in securing funding through traditional means due to their **high-risk** profile. 2. It typically involves a mix of loan financing and equity investment, where the investor acquires partial ownership of the business. ## Choosing the Right Source of Finance [block_111] 1. Selecting the appropriate source of finance depends on several factors: 1. **Timeframe**: Short-term needs (e.g., overdrafts) vs. long-term investments (e.g., share capital). 2. **Cost**: Interest rates, fees, and opportunity costs. 3. **Control**: Will the source dilute ownership or influence decision-making? 4. **Business Structure**: Not all sources are available to every type of business. [{"_key":"a35c25d97f0a","_type":"block","asset":null,"children":[{"_key":"bfa7976294b70","_type":"span","marks":[],"text":"Venture capital is best suited for businesses with high growth potential, such as tech startups or innovative industries."}],"markDefs":[],"style":"normal"}] [{"_key":"block_119","_type":"block","asset":null,"children":[{"_key":"SKegYEUhosFtAcmMhiL3kH","_type":"span","markDefs":[],"marks":[],"text":"Which source of finance would you recommend for a startup seeking $50,000 to launch a new product? Why?"}],"markDefs":[],"style":"normal"}] [{"_key":"block_122","_type":"block","asset":null,"children":[{"_key":"SKegYEUhosFtAcmMhiL3nR","_type":"span","markDefs":[],"marks":[],"text":"How do cultural attitudes toward risk and ownership influence the choice of financing methods in different countries?"}],"markDefs":[],"style":"normal"}] [{"_key":"fea8648c1a0d","_type":"block","asset":null,"children":[{"_key":"f8ff3ff8c0b3","_type":"span","marks":[],"text":"Does "},{"_key":"50af4ffec7c8","_type":"span","marks":["strong"],"text":"creativity "},{"_key":"019255df7913","_type":"span","marks":[],"text":"get affected if the new entrepreneurs do not get sufficient finance on time?"}],"markDefs":[],"style":"normal"}]