external sources of finance: share capital, debentures, new partners, venture capital, bank overdrafts, leasing, hire purchase, bank loans, mortgages, debt factoring, trade credit, micro-finance, crowd funding and government grants

5.2 Sources of Finance – External Sources

💰 Share Capital (Equity)

Selling ownership shares to investors. No repayment needed, but you share profits and control.

• Example: A tech start‑up issues shares to angel investors.
• Pros: No interest, no repayment deadline.
• Cons: Dilutes ownership, may lose control.

📈 Debentures (Debt)

Long‑term loans secured by assets. You pay interest and repay the principal at maturity.

• Example: A manufacturing firm issues debentures to raise £5m.
• Pros: Fixed interest, no ownership loss.
• Cons: Must repay principal, interest can be high.

🤝 New Partners (Partnership)

Bringing in a partner who contributes money and shares profits.

• Example: Two friends start a café; one invests £10k.
• Pros: Shared responsibility, shared risk.
• Cons: Shared profits, potential disagreements.

🚀 Venture Capital

Investment from VC firms in high‑growth businesses in exchange for equity.

• Example: A mobile app company secures £2m VC funding.
• Pros: Large sums, expertise, networking.
• Cons: Loss of control, high expectations.

🏦 Bank Overdraft

A credit limit on your current account; you pay interest only on the amount used.

• Example: A retailer uses a £20k overdraft to cover seasonal stock.
• Pros: Flexible, quick access.
• Cons: Interest can be high, limited limit.

📦 Leasing

Renting equipment with an option to buy at the end.

• Example: A bakery leases a commercial oven for 3 years.
• Pros: Preserves cash, keeps equipment up‑to‑date.
• Cons: Total cost may exceed purchase price.

🛠️ Hire Purchase

Buy now, pay later in installments; ownership transfers after final payment.

• Example: A small business buys a delivery van on hire purchase.
• Pros: Immediate use, no large upfront cost.
• Cons: Interest, ownership delayed.

🏦 Bank Loans

Fixed or variable interest loans with a set repayment schedule.

• Example: A shop owner takes a £30k loan to renovate.
• Pros: Predictable repayments, can be large.
• Cons: Requires collateral, strict eligibility.

🏠 Mortgages

Long‑term loans secured against property.

• Example: A company buys a warehouse with a £500k mortgage.
• Pros: Low interest, long term.
• Cons: Requires property, long commitment.

💳 Debt Factoring

Selling invoices to a third party for immediate cash.

• Example: A wholesaler sells invoices to a factoring company for 90% cash.
• Pros: Quick cash, no new debt.
• Cons: Fees, loss of control over collection.

💸 Trade Credit

Suppliers allow you to pay after a set period (e.g., 30 days).

• Example: A retailer receives goods and pays after 60 days.
• Pros: Improves cash flow, no interest.
• Cons: Must maintain good supplier relationships.

🌱 Micro‑Finance

Small loans or grants for entrepreneurs in developing regions.

• Example: A small shop owner gets a £500 loan from a micro‑finance institution.
• Pros: Accessible, low collateral.
• Cons: Small amounts, high interest.

💬 Crowd Funding

Raising small amounts from many people via online platforms.

• Example: A designer launches a Kickstarter for a new product line.
• Pros: Market validation, marketing.
• Cons: Requires strong marketing, no guarantee of success.

🏛️ Government Grants

Non‑repayable funds from government bodies for specific projects.

• Example: A renewable energy firm receives a £50k grant for research.
• Pros: No repayment, boosts credibility.
• Cons: Competitive, strict conditions.