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Organisations and the financial system
Organisations and the financial system

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1.3 External sources of finance

External sources of finance are funds available to business organisations that are derived from outside the boundaries of the organisation itself. As discussed at the beginning of Section 1.1, these can be further divided into debt and equity finance.

A key difference between debt and equity finance is the implications they have for the ownership of the business. Utilising debt finance to fund activities does not imply a dilution of control over the business for the owners. On the contrary, when choosing equity finance the owners should be ready to accept sharing control with the investors (shareholders) who are providing the funds by buying a portion of the company. The following sections illustrate the main sources of external financing available to business organisations.

Table 2 (b)  Sources of finance
Internal External
Debt Equity
Short-term
  • Debt factoring
  • Invoice discounting
  • Working capital management
  • Bank overdrafts
  • Bank loans
  • Crowdfunding
  • Peer-to-peer lending
  • Crowdfunding
Long-term
  • Retained earnings
  • Bank loans
  • Financial lease
  • Hire purchase agreements
  • Bond issuance
  • Business angels and venture capital
  • Stock issuance