Business

External Sources of Finance

External sources of finance refer to funds obtained from outside the business, such as through loans, issuing bonds, or seeking investment from external parties. These sources provide businesses with additional capital to fund operations, expansion, or investment in new projects. By utilizing external sources of finance, businesses can access resources beyond their internal funds to support growth and development.

Written by Perlego with AI-assistance

7 Key excerpts on "External Sources of Finance"

Index pages curate the most relevant extracts from our library of academic textbooks. They’ve been created using an in-house natural language model (NLM), each adding context and meaning to key research topics.
  • Business Planning: A Guide to Business Start-Up
    • David Butler(Author)
    • 2007(Publication Date)
    • Routledge
      (Publisher)

    ...Chapter 8 Sources Chapter 8 of finance Chapter 8 The chances are that unless you win the National Lottery, inherit a fortune, marry a rich widow or toy boy or find a sugar daddy, that you will sooner or later have to raise some short-term or long-term finance for your business. The most obvious source of funding for most owner-managers is from the local high street bank, but this is not necessarily the cheapest or best way of financing a particular borrowing requirement. The purpose of this chapter is to examine some of the potential sources of finance that are available for new and expanding businesses, and to examine their relative uses, advantages and disadvantages. For the NVQ candidate, Element 4.2 ‘Identify how the business will be funded’ requires the candidate to demonstrate that various funding options have been examined and appropriate choices made, and that these can be fully justified. In many cases this will involve considering not just the finance required for the initial start-up phase of the business to cover the period until the firm achieve regular profitable trading. It is just as important to consider and identify the available options for the next stage, when the firm starts to expand, possibly at a rate which is faster than receipts from profits can support. The effective planning of finance at this stage is critical to avoid over-trading, where the business is growing beyond the level which can be supported by its own working capital. This is one of the most common causes of business failure, when growth outstrips working capital and results in a cash flow crisis and inability to pay suppliers, wages etc. on time. In this situation, profits might be excellent, but the firm is still technically insolvent and, therefore, trading illegally...

  • Financial Accounting  (RLE Accounting)
    eBook - ePub
    • John Blake(Author)
    • 2013(Publication Date)
    • Routledge
      (Publisher)

    ...8 SOURCES OF FINANCE Objectives This chapter has two broad objectives: 1 To give an introduction to the various sources of finance shown in a business balance sheet, explaining their significance and how they are accounted for. 2 To introduce the major factors taken into account in deciding how to raise finance for the establishment, running, and expansion, of a business. Specifically we consider 1 The ways in which new shares can be issued. 2 Retained profits as a source of finance. 3 Forms of long-term borrowing. 4 Types of short-term borrowing. 5 The nature of the tax liabilities shown in the balance sheet. 6 Sources of finance which do not appear in the balance sheet. 7 The effect of the financial structure on fluctuations in profit (gearing). 8 The relationship between the trading structure and the financial structure. 9 The factors taken into account in choosing between sources of finance. Raising funds from share issues One of the sources from which a new company will derive funds will be from the issue of shares in the business. If additional finance is required during a company's life an issue of new shares is one way of raising finance that might be considered. In this respect a private company, which is not permitted to issue any form of security to the public, is at a severe disadvantage compared to a public company. A public company will normally only be able to benefit from the legal permission to issue securities to the public if it is listed on the Stock Exchange. To become a listed company requires approval from the Council of the Stock Exchange, which is only granted if a range of regulations are complied with...

  • SME Finance and the Economic Crisis
    eBook - ePub
    • Alina Hyz(Author)
    • 2019(Publication Date)
    • Routledge
      (Publisher)

    ...Firms using external funds need to service interest payments and as a result, shall have positive cash flow. Usually, it is difficult to achieve by many young companies. Consequently, young firms use initial insider finance, angel finance, and during the later stages, they may use venture capital. Trade credit is vital in all stages. But the level of its use depends on age and reputation. As far as bank debt is considered, its use depends on the tangible assets owned by the firm and so is especially important for mature and less informationally opaque firms. As the firms mature, the creditworthiness increase and problems of moral hazard are reduced. In general, and as it was discussed before, the use of external sources of financing increases during the firm’s life cycle. Some researchers connect the availability of initial insider finance with the economic and demographic situation of the country. Worsening of the condition may influence a new firm’s formation (Brewer et al., 1996). Weston and Brigham (1970) present six phases of the financial life cycle. They connect each phase with the main available sources of financing and main financial problems characteristic for each stage. Access to sources of capital is determined, to a large extent, by the firm’s development phase, which has a significant impact on the evaluation of its creditworthiness. During the early phases of their growth, firms must rely primarily on financial resources possessed by their owners and their families, sometimes on assistance funds or venture capital. During further phases of its development, the firm is financed primarily from the accumulation of financial surpluses and additionally using external capital. Mature firms (mainly medium-sized enterprises) have easier access to external capital and bank loans than other groups of firms from the SME sector (Table 1.2)...

  • Types and Sources of Finance for Start-up and Growing Businesses

    ...In addition, businesses that are highly geared (i.e. those with large borrowings in relation to their equity) are more likely to face difficulties in the event of a slowdown in demand or an unexpected loss. As always, it’s a question of balance. The equity, which is the fixed capital of the business, needs to be sufficient to support the business after all other factors have been taken into account, with sufficient headroom to weather unexpected storms, should these occur. One well-established principle is that a business should not borrow short to invest long – for example, the use of an overdraft facility that is repayable on demand to finance property or equipment that will be used by a business over many years. If the overdraft is called in, it may be difficult to realise the assets or secure alternative finance, potentially causing the business to commit the ultimate sin – running out of cash. “Trying to fund growth in the long term using short-term finance is not going to work,” says David Molian of Cranfield School of Management. “Historically too many businesses have relied on short-term debt funding, principally overdraft arrangements from their bank, which are liable to be vulnerable in recessionary periods.” There are four main financing options: equity, debt, sales and asset financing. All of these, bar equity, involve the business taking on borrowings. In practice, most businesses will use a number of different sources over time. Financing options TYPE: Debt or equity SOURCE: Friends and family Many businesses start with funding from friends or family, aka the ‘Bank of Friends’ or the ‘Bank of Mum & Dad’. In practice, this will often be the cheapest and easiest route to gaining early stage funding, with loans often being made on a low interest or even an interest-free basis...

  • Improve Your Cash Flow: Teach Yourself
    • Robert McCallion, Alan Warner(Authors)
    • 2010(Publication Date)
    • Teach Yourself
      (Publisher)

    ...6 Sources of funding In this chapter: the main sources of funding: debt and equity sources of equity funding loan capital types of loan agreement requirements for loan finance real-life stories The main sources of funding: debt and equity There are two main alternative sources of funding but, within that framework, a number of options. The alternatives are the choice between two fundamentally different forms of finance – debt and equity – which we need to explain before we look at the options in more detail. Debt finance is money borrowed from people or institutions that are willing to lend you money, on which you will have to pay interest. The bad news is that this interest has to be paid whether or not you make profit; the good news is that the lenders are not in any way owners of the company and will not be entitled to voting rights or dividend. Equity finance is money obtained from investors to whom you are, in return, giving a share of the ownership. The implications are the reverse of the above; the bad news is that you have to share dividend with them when profits are made; the good news is that they cannot insist on such payment if profits are not being made. Insight It is interesting – and a frequent source of confusion – that the risk of taking equity finance, rather than debt, can be seen in opposite ways, depending on your perspective. Equity is higher risk for the investor but lower risk for the company. This fundamental difference should be the basis of the choices you make once you know how much cash is required to run the business and, in principle, it should be determined by your attitude to risk...

  • Airline Finance
    eBook - ePub
    • Peter S. Morrell(Author)
    • 2018(Publication Date)
    • Routledge
      (Publisher)

    ...Chapter 5 Sources of Finance Airline finance has in the past generally been readily available to the majority of airlines, in spite of a worse record of profitability than many other industries, and the cyclical nature of airline earnings. This was because of government involvement, either directly through ownership of the national airline or through loan guarantees. However, even privately owned airlines have found little difficulty in financing aircraft (historically 80–90 per cent of total capital expenditure), due to the possibility of re-possession and re-sale of the asset. The origin of finance for the airlines, as for any other industry, has been individual and corporate savings. Money from individuals would be channelled through banks as well as pension funds, insurance companies, mutual funds, investment and unit trusts. These institutions would in turn lend to banks, which would act as intermediaries in lending on to airlines, buy airline shares or bonds, or participate in leasing arrangements. Corporations would place surplus funds with banks or participate directly in aircraft leases. Leases might also attract wealthy individuals paying high marginal rates of tax. In the 1980s, Japanese financial institutions supplied around half of the US$20bn per annum in loans to the air transport industry. 1 This share declined significantly in the 1990s, principally because of the gradual application to Japanese banks of the 8 per cent capital adequacy level agreed through the Bank for International Settlements (BIS). Those financial institutions which are most heavily involved in lending to the airline industry will be examined in more detail later in this chapter. Airline capital expenditure can be financed internally from cash or retained earnings or externally from lenders or lessors using a variety of financial instruments. It is difficult to obtain comprehensive data on the sources of finance for aircraft deliveries...

  • Finance and Development
    eBook - ePub

    Finance and Development

    The Role Of International Commercial Banks In The Third World

    • Michael DaCosta(Author)
    • 2019(Publication Date)
    • Routledge
      (Publisher)

    ...5 Sources of External Finance to Developing Countries In the heated debate over the large volume of external debt incurred by non-oil developing countries, it is sometimes forgotten that foreign exchange earnings from the export of goods and services finance about 70 to 80 per cent of all import requirements. In relative terms, therefore, external capital flows provide only a small proportion of the foreign exchange needs of this group of countries. Table 5.1 shows that in the 10-year period, 1973 to 1982, export earnings on average financed 75 per cent of total import requirements. Official external sources, i.e. bilateral and multilateral aid, financed about 8 per cent while private, including bank, financing accounted for 12 per cent. Table 5.1 Import Financing of Non-Oil Developing Countries:1973-1982 (Percentage) Merchandise Imports (f.o.b.) 96 Net Services and Private Transfers 4 TOTAL 100 = = = FINANCED BY: Merchandise Exports (f.o.b.) 75 Official Capital and Aid 8 Private Long-term Capital: 12 Direct Investment (3) Long-term Loans (9) Residual Flows 5 100 = = = SOURCE : I.M.F.: World Economic Outlook - 1982 In what follows, an assessment of existing sources of external finance is attempted in the light of both their present and potential importance to the developing countries. Although the emphasis here is on financial flows, it is also acknowledged that non-financial assistance in the form of food aid and technical assistance, for example, may be of equal, or greater importance, especially to the least-developed countries. 1. Exports As Table 5.1 indicates, export earnings are the largest source of foreign-exchange to non-oil developing countries. In 1981, for example, such earnings provided some $327 billion out of a total foreign exchange requirement of $426 billion...