Entrepreneurship – from ideas to reality
Entrepreneurship – from ideas to reality

Start this free course now. Just create an account and sign in. Enrol and complete the course for a free statement of participation or digital badge if available.

Free course

Entrepreneurship – from ideas to reality

6 Debt

The most common cause of failure in small businesses is the inability to generate the cash to repay debt and repay interest costs. Once internal sources, such as working capital, have been considered, either equity or debt finance can be used to satisfy shortfalls in cash. A business owner may inject further cash in the form of equity, and may share the financial risk by inviting other investors to contribute additional equity investment. The equity investors might then consider if any other forms of finance are required to reduce their risk and meet planned expansion.

There is a range of different types of debt agreements.

  • Preference shares – these often carry a guaranteed fixed interest rate and rank ahead of ordinary shares in any repayment arising from insolvency.
  • Loan stock or debentures – debentures are a special form of contracted loan, usually redeemable at a specific maturity date. They may be issued to raise capital for the purchase of specific assets, and may be secured on those assets.
  • Bonds – another form of a contracted loan. Bonds are potentially tradable, although usually unsecured.
  • Leasing – specific assets may be acquired using lease finance, which would always be secured on the asset. Leasing saves an upfront, large cash outflow for the purchase of the asset. It can be less risky than borrowing from a bank as the lease is secured on the asset (being leased), rather than the owner’s property or other business assets. A lease contract requires the commitment to regular payments and there may be an early cancellation fee.
  • Bank loans – bank loans are usually arranged for a fixed period, carrying a fixed or variable rate of interest. They are often secured on specific assets or on the business as a whole.
  • Bank overdraft – an overdraft is offered at the discretion of the bank. It can be cancelled at any time – and not necessarily because of any concerns about the business itself. Sometimes internal bank decisions or concerns about the external economic environment may influence this. An overdraft is suitable for funding short-term cash shortfalls. It is repayable on demand and there will be interest charges and a fee for using this flexible type of borrowing.
  • Suppliers or trade payables  – suppliers give an interest free loan if they offer credit terms of a month. Suppliers will assess the credit standing of a business before offering generous credit terms.

Next you will consider the potential of business grants.


Take your learning further

Making the decision to study can be a big step, which is why you'll want a trusted University. The Open University has 50 years’ experience delivering flexible learning and 170,000 students are studying with us right now. Take a look at all Open University courses.

If you are new to University-level study, we offer two introductory routes to our qualifications. You could either choose to start with an Access module, or a module which allows you to count your previous learning towards an Open University qualification. Read our guide on Where to take your learning next for more information.

Not ready for formal University study? Then browse over 1000 free courses on OpenLearn and sign up to our newsletter to hear about new free courses as they are released.

Every year, thousands of students decide to study with The Open University. With over 120 qualifications, we’ve got the right course for you.

Request an Open University prospectus371