Business – 5.2 Sources of finance – Business ownership and sources | e-Consult
5.2 Sources of finance – Business ownership and sources (1 questions)
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The form of ownership determines both the legal status of the business and the perception of risk by external financiers, which in turn affects the finance options that are realistically available:
- Sole trader: Limited to personal savings, credit cards, overdrafts, and borrowing against personal assets. External investors are rarely attracted because the business lacks a separate legal identity.
- Partnership: Can access the partners’ combined personal resources, bank loans, and limited forms of external finance such as trade credit. The partnership may also raise capital by admitting new partners, but it still lacks the credibility of a limited company.
- Private limited company (Ltd): Separate legal entity, allowing it to raise equity by issuing shares to a small group of investors, obtain bank loans with limited liability, and access venture capital or angel investors. The limited liability reduces risk for lenders and investors.
- Public limited company (PLC): Can raise large amounts of equity by issuing shares on a stock exchange, access corporate bonds, and obtain substantial bank facilities. The public listing provides greater transparency and credibility, attracting institutional investors.
Thus, as ownership moves from sole trader to PLC, the scope and scale of finance sources expand, largely because of increased credibility, limited liability, and the ability to issue securities.