External finance - Banks - Sources of finance - National 5 Business management Revision - BBC Bitesize (2024)

FAQs

What are the external sources of finance? ›

External sources of finance refer to money that comes from outside a business. There are several external methods a business can use, including family and friends, bank loans and overdrafts, venture capitalists. and business angels, new partners, share issue, trade credit, leasing, hire purchase, and government grants.

Leasing is a way of renting an asset that the business requires, such as a coffee machine. Monthly payments are made and the leasing company is responsible for the provision and upkeep of the leased item.

A bank loan is a long term source of finance. It is a fixed amount of money that is given to a business by the bank that has to be repaid over time with interest.

Crowdfunding involves a large number of people investing small amounts of money in a business, usually online. Commonly used crowdfunding websites include Crowdfunder, GoFundMe and Kickstarter. Advantages of crowdfunding include: It acts as a form of market research.

Examples of external sources of finance include family/friends, bank loans, mortgages, overdrafts, issuing shares, government grants, or trade credits.

In the theory of capital structure, external financing is the phrase used to describe funds that firms obtain from outside of the firm. It is contrasted to internal financing which consists mainly of profits retained by the firm for investment. There are many kinds of external financing.

Advantages of External Sources of Finance

Increased funds: External sources provide additional capital that can be used to support growth, expand operations, and invest in new projects.

External sources, are the capital arranged from outside the business, unlike retained earnings which are internally generated out of the activity of a business.

External sources of finance advantages and disadvantages

The common disadvantages are the cost or credit, the time it takes to apply and the eligibility criteria. With equity investment, you can get capital with limited trading history and before you've built up your credit rating.

What are the sources of finance for banks? ›

Banks have a range of possible sources of funding available to them, including savers' retail deposits and investors' wholesale funding, as well as the bank's capital base.

A bank overdraft is a common external and short-term source of finance for a business.

A co-operative is a business that is owned and run by its members. Co-operatives can be owned by the customers, employees or local residents. Co-operatives are set up to benefit their members.

Technically, venture capital (VC) is a form of private equity. The main difference is that while private equity investors prefer stable companies, VC investors usually come in during the startup phase.

Debentures are loans given to the business by individuals. Interest.

Examples of External Financial Statements

balance sheet (statement of financial position) statement of cash flows (cash flow statement) statement of stockholders' equity (statement of shareholders' equity, statement of equity) notes to the financial statements.

The term external sources of finance refers to money that comes from outside the business. This may include bank loans or mortgages, and so on. Internal sources of finance include money raised internally, i.e. by the business or its owners, they do not include funds that are raised externally.

External sources means information from any source other than the Internal Sources, including information from licensed or subscription-based licensed (e.g. OVID, Dialog, RSS aggregator databases) sources and non-licensed (e.g. Yahoo, MSN, CNN) sources.

These numbers are based on the expected growth of assets and liabilities. For example, a business that expects sales to grow by 25% would increase the current total assets and liabilities by 25% and calculate the external financing needed.