Business growth - EdexcelExternal sources of finance

Capital found from within a business is called an internal source of finance, whereas capital found from outside a business is an external source of finance.

External sources of finance

Loan capital

Loan capital is a lump sum of capital borrowed from a bank and paid back in instalments.

Advantages:

• regular repayments are made over a period of time

Disadvantages:

• sometimes it can take a while for a loan to be approved and the business may not even qualify for a loan
• interest is applied, so this can be an expensive option
• banks may also ask for collateral (security) in case the business fails to make repayments

Share capital

Share capital is money raised when a business becomes a private limited company by offering shares to a select group of people in return for capital.

Advantages:

• does not have to be repaid and no interest is applied
• a business can choose to whom it offers shares

Disadvantages:

• profits made by the business are paid to shareholders (these payments are also known as dividends), so control of the business gets diluted

Stock market flotation

Stock market flotation is money raised when a business becomes a PLC (public limited company) by offering shares to the public to buy.

Advantages:

• this option can raise large amounts of capital as it is easy for the public to buy shares through a stockbroker or bank
• the shares don’t have to be repaid and no interest is applied
• the business can also gain recognition through this method

Disadvantages:

• it can be complicated and expensive and there is the possibility of losing control, as anyone can buy shares
• the profits are paid to shareholders and the business records are made public
• there is also the risk that some investors will only buy shares to make a quick profit by selling them when the share price increases