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Explain the External Sources of Finance Available to a Retail Business

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Explain the External Sources of Finance Available to a Retail Business


External sources of finance are funds that come from outside the business. It involves the business getting loans from individuals or institutions. External sources of finance can be divided into two parts; short term and long term. Long term has two main branches; share capital & loan capital which will be divided further below. Short term has one main branch, which is divided into bank overdraft, hire purchase, trade credit, leasing etc

Limited liability companies are the largest form of business enterprise. The larger the business, the more they depend on investment from individuals. Finance is supplied by individuals buying shares of company. Limited companies depend mostly on external sources of finance.

External long term sources of funds

SHARE CAPITAL: for a limited company share capital is likely to be the most important source of funds. The sale of shares can raise large amount of money it is often referred to as PERMANENT CAPITAL. This is because it not normally repaid by the business, once share as been sold, and the buyer is entitled to a share in the profit of the company called DIVIDEND. Shares are sold on the STOCK EXCHANGE MARKET. There are different types of share capital that can be issued for example

„P Ordinary shares: these are EQUITIES and are the most common type of shares issued. There is a lot of risk involved in this type of shares, because dividend is not guaranteed.

„P Preference share: this type of shares allows it owners receive a fixed rate of return when dividend is declared. The risk involved in this share is that shareholders are entitled to their dividend before the holders of ordinary shares.

„P Deferred share: this not a common type of share capital because it not often used and is held by the founders of the company. Deferred shareholders only receive a dividend after the ordinary shareholders have been paid a minimum amount.

LOAN CAPITAL: Money borrowed for a lengthy period of time by a business is called LOAN CAPITAL. It comes from four sources namely

„P Debentures: the holders of debenture loan (creditor of the business) are entitled to an agreed fixed rate of return, but they do not have any voting right .Any amount of money borrowed must be repaid by the expiry date.

„P Mortgage:

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