External Finance

External Sources of Finance

External sources of finance raise finance (money) from a third party. The finance can be used to fund large, long-term investments. However, external finance can be more costly, because loans usually charge interest (which isn't paid if a company funds growth with retained earnings). Some sources of external finance are:

Bank loans or mortgages

Bank loans and mortgages are very important for many businesses. A business borrows money from a bank and then pays interest on the money borrowed.
It is often harder for new businesses to get bank loans because banks see them as riskier.

Loans from family and friends

Start-ups often use loans from family and friends. This is usually because the entrepreneur doesn’t have enough personal savings to finance the investment.
If the entrepreneur gives up equity (a share of the business) then this is not a loan.

Hire purchases

This is when a business buys something and instead of paying for it upfront pays for it in installments.
When PSG bought Kylian Mbappe from Monaco, they didn’t pay the whole amount at the time and instead completed the purchase in different stages.
This lets businesses buy things (like machinery) for the business that they otherwise wouldn’t be able to afford.

Trade credit

Trade credit describes when businesses pay suppliers at a later date. It involves buying something now and paying for it later.
Supermarkets use trade credit and trade creditors a lot, taking delivery of food and then paying the suppliers at a later date.

Government grants

A government may give grants (money) to businesses to research things that the government is interested in.
The Horizon 2020 fund is a set of grants given out by the countries in the European Union.

External Sources of Finance

External sources of finance raise finance (money) from a third party. The finance can be used to fund large, long-term investments. However, external finance is often more expensive because businesses pay interest on loans. There are several sources of external finance:

Debt factoring

Debt factoring involves businesses selling their debt to a third party business.
The business selling its debt will gain cash immediately rather than wait for debts to be settled although the business will sell its debt for less than its original value.
The third party that buys this debt will then arrange and organise invoices and ensure that the debt money is collected. The third party business will retain a fee to cover the costs of its debt collection service.

Overdraft

An overdraft is a service offered by banks allowing businesses to borrow an amount of money up to a limit which has been agreed in advance.
Overdrafts are flexible as they allow a business to borrow as much as it wishes provided that the amount stays within an agreed limit.
Businesses often pay for this flexibility through higher interest rates.

Venture capital

Venture capital involves investors, or venture capitalists, providing a business with loans and share capital which is usually to support business growth.
Venture capitalists will often ask for some control of the business they are investing in and this can be through the issue of shares or through the appointment of venture capitalists as non-executive directors of the business.

1Exploring Business

2Marketing Campaigns

2.1Marketing

2.1.1Setting Marketing Objectives

2.1.2Customer Needs

2.1.3The Market

2.1.4Competition & The Market

2.1.5Consumer Behaviour

2.1.6Market Research

2.1.7Forms of Market Research

2.1.8Market Segmentation

2.1.9Cultural & Social Factors in Marketing

2.1.10Promotional Decisions 3

2.1.11Pricing Strategies

2.2Marketing Mix

2.2.1Marketing Mix

2.2.2Product Life Cycle

2.2.3Pricing Decisions & Price Skimming

2.2.4Pricing Decisions & Price Penetration

2.2.5Promotional Decisions

2.2.6Promotional Decisions 2

2.2.7Promotional Decisions 3

2.2.8Market Mapping

3Business Finance

3.1Sources of Finance

3.1.1Internal Finance

3.1.2External Finance

3.1.3External Finance 2

3.1.4Sources of Business Finance

3.2Financial Planning

3.2.1Revenue

3.2.2Costs

3.2.3Cash & Cash Flow

3.2.4Cash & Cash Flow 2

3.2.5Break-Even Analysis

3.2.6Profits

3.3Financial Statements

3.3.1Balance Sheets

3.3.2Income Statements

3.3.3Liquidity

4International Business

4.1Globalisation

4.1.1Growing Economies

4.1.2Specialisation & Trade

4.2International Business

4.2.1Internationalisation

4.2.2International Trade

4.2.3MNCS

4.2.4Conditions that Prompt Trade

4.2.5Assessment of a Country

4.3International Economic Environment

4.3.1Globalisation

4.3.2Factors Contributing to Globalisation

4.3.3Protectionism

4.3.4The EU & the WTO

4.3.5Trading Blocs

4.4Factors Affecting International Business

4.4.1Global Competitiveness

4.4.2Ethics of Global Business

4.4.3Controlling MNCs

4.4.4Cultural & Social Factors in Marketing

5Principles of Management

5.1Management & Leadership

5.1.1Managers

5.1.2Management Theories

5.1.3Managing Organisational Culture

5.1.4Management Style

5.2Theories of Motivation

5.2.1Motivating & Engaging Employees

5.2.2Taylor's Theory

5.2.3Mayo's Theory

5.2.4Maslow's Theory

5.2.5Herzberg's Theory

5.3Managing Change

5.3.1Change

5.3.2Key Factors in Change

5.3.3Scenario Planning

5.3.4Managing Change

5.3.5Managing Strategic Implementation

6Business Decision Making

6.1Business Principles & Practices

6.1.1Influences in External Environments

6.1.2Product Decisions

6.1.3Competitive Environment

6.1.4Corporate Strategy

6.1.5Quantitative Sales Forecasting

6.1.6Legislation

6.2Quality Management

6.2.1Importance of Quality

6.2.2Measuring Quality

6.2.3Total Quality Management

6.2.4Evaluating TQM

6.3Human Resources

6.3.1Contracts

6.3.2Recruitment

6.3.3Training a Workforce

6.4Documents & Business Decisions

6.4.1Sales Forecasts

6.4.2Managing Strategic Implementation

6.4.3Problems with Strategy

Jump to other topics