3.1.3

External Finance 2

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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:

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Business angels

  • Businesses can obtain finance through business angels.
  • A business angel is usually an experienced and affluent individual who provides funding in exchange for ownership.
  • This source of finance has advantages and disadvantages:
    • Business angel funding involves transferring some ownership which can reduce the original owner’s control.
    • Business angel funding means that businesses do not have to pay interest.
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Crowdfunding

  • Businesses can obtain funding through crowdfunding. Websites like Seedrs and Kickstarter offer crowdfunding.
  • Crowdfunding refers to raising finance by allowing large numbers of people to donate often small sums of money to a project or venture.
  • This source of finance has advantages and disadvantages:
    • Crowdfunding means that a business owner can retain their existing ownership as the source of finance does not require the sale of shares of the transfer of some ownership.
    • Crowdfunding can take a long time and may be unsuitable for businesses that need to access funding quickly.
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Example of crowdfunding

  • For example, GoFundMe is a crowdfunding platform that allows individuals and businesses to share information relating to a new product or proposed venture.
  • Other people can then decide to donate to the individual or business should they decide to do so.
  • People often make donations in return for a free trial or to access a pre-release of the product should the venture be successful.

Jump to other topics

1Exploring Business

2Marketing Campaigns

3Business Finance

4International Business

5Principles of Management

6Business Decision Making

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