External Sources of Finance

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.