External Sources of Finance – debt – short-term borrowing (overdraft, commercial bills, factoring), long-term borrowing (mortgage, debentures, unsecured notes, leasing)
External sources of finance are those obtained outside the business.
Short term borrowing:
- Overdraft: bank allows a business to overdraw its account to a predetermined limit
- Commercial bills: type of loan issued by non-bank institutions
- Factoring: selling of accounts receivables for a discounted price to a finance or factoring company
Long term borrowing:
- Mortgage: Loan secured by the property of the business
- Debentures: issued by a company for a fixed rate of interest and for a fixed period of time
- Unsecured notes: loan for a set period of time but is not backed by any collateral or assets
- Leasing: involves for the payment of money for the use of equipment that is owned by another party
– equity – ordinary shares (new issues, rights issues, placements, share purchase plans), private equity
- Private equity: Raised by a private company through selling partial ownership of the business.
- Public equity: Raised by a public company by selling partial ownership of the business through the sale of shares to the general public.
- Ordinary and Preference shares:
- Ordinary shares – their owners do not have voting rights at AGMs.
- Preference shares provide more security.
- New share issues: Company sells its shares for the first time and all the money raised goes to the company itself.
- Rights issues: Company wishes to sell additional shares and organises a rights issue for existing shareholders.
- Share placements: Company offers additional shares to institutions and other major investors to raise urgent funds.
Extract from Business Studies Stage 6 Syllabus. © 2010 Board of Studies NSW.