External Sources of Finance (HL IB Business Management)

Share Capital

• Share capital is finance raised from the sale of shares in a limited company through flotation or a rights issue
  
  
• Shareholders are the owners of shares and they are entitled to a share of the company’s profit when dividends are declared
  
  
• Shareholders usually have a vote at a company’s Annual General Meeting (AGM) where they can have a say in the composition of the Board of Directors

Loans

• Secured loans are more likely to be available to larger businesses and are typically repaid over five to twenty years
  • Interest rates may vary over the term of the loan and terms may be renegotiated if needed
  • Failure to make repayments can mean a business has to convert non-current assets into cash (sell them)
    
    
• Mortgages are long-term secured loans
  • They are typically used by a business to purchase buildings, land or large items of capital equipment
  • Interest is payable and assets are at risk if the business does not make repayments as planned 

Overdrafts

• This is an arrangement between the business and their bank to spend more money than it has in its account 
  • A limit is agreed and interest is charged only when a business ‘goes overdrawn’
  • It is a  short-term source of finance that offers significant flexibility and aids cash flow
     
• An overdraft may be ‘called in’ if the bank is concerned about a business's ability to repay what it owes
• Some large businesses rely heavily on overdrafts to manage working capital

Trade Credit

• An agreement is made with suppliers to buy raw materials, components and stock which are then paid for at a later date, typically 30 to 90 days later
  • Trade credit is usually interest-free
  • Although trade credit may also be available for small businesses, larger businesses tend to be able to request more generous trade credit terms from suppliers

Leasing

• Assets such as machinery or a fleet of vehicles are made available to the business in return for regular payments (a form of rental)
  • The business does not own the asset during the period of the lease and so is not responsible for maintenance or repair costs
  • E.g. many businesses lease office equipment such as photocopiers and IT equipment
     
• Leasing is usually more expensive in the long run than buying an asset

Crowdfunding

• Crowdfunding allows businesses to access finance provided by a large number of small investors on online platforms such as Kickstarter
  
  
• Businesses need to provide a persuasive business plan to convince individuals to invest in their product as they will be competing with many other projects online
  • Investors are often attracted by incentives such as a sample or early access to a product
  • E.g. In November 2022 well-known Twitter commentator Russ Jones published his long-awaited book funded via Unbound, a crowdfunding publisher

Micro-finance Providers

• Micro-finance providers are small lenders who make finance directly available to individuals or businesses who would be unable to access finance from anywhere else (they are considered to be risky0
  • These are a useful source of funds for businesses that may not qualify for other sources of funds
  • There are usually few formalities in applying for finance though the amount available is usually very limited
  • Many providers operate on a crowdfunding basis
  • Examples may include credit unions and some charities such as Kiva

Business Angels

• Some individuals specialise in making investments in start-up or expanding businesses e.g. Dragons Den investors
   
• These business angels tend to be more willing to take a risk than banks
   
• Finding the ‘right’ business angel (e.g. with appropriate experience, expertise or interest) can be challenging
  • In most cases getting the support of a business angel relies on knowing the ‘right people so networking is vital when entrepreneurs seek this kind of investment
     
• As business angels own a stake in the business, they may be involved in decision-making and will receive a share of business profits