External Finance 2
Business: BTEC Level 3 National Extended Diploma, topic 3.1.3
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:
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.
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.
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.
Test yourself on External Finance 2
What do business angels buy when they invest in a business?