EXTERNAL ECONOMIC CAPITAL
External sources of finance are equity capital, preferred stock, debentures, term loans, venture capital, leasing, hire purchase, trade credit, bank overdraft, factoring etc.
By external sources, we mean the capital arranged from outside the business, unlike retained earnings which are internally generated out of the activity of a business.
A primary sources of external financing for small businesses is bank loans. The characteristics of a term loan are very similar to debentures except that it does not include too much cost of issuing because it is given by some bank or financial institutions. The characteristics of a term loan are very similar to debentures except that it does not include too much cost of issuing because it is given by some bank or financial institutions.
Credit given to a business by their creditors/ suppliers. It allows a business to delay its payments for some period. The period of credit depends on the credit terms between the business and the suppliers.
Companies that would prefer to avoid the liabilities that come with debt financing can obtain additional capital by equity financing. One source of equity financing is the so-called "angel investor." These investors contribute to improving the equipment capital, marketing strategies and industry knowledge base in exchange for small portions of equity of the target company. In return, angel investors look for companies with high potential and above-average rates of return on investment (ROI).
Funding that facilitates the exchange of equity ownership in a company for capital investment via an online funding portal as per the Jumpstart Our Business Startups Act (alternately, the "JOBS Act of 2012") (U.S.) is known as equity crowdfunding.
A form of equity financing is venture capital. Venture capitalists find companies with growth potential and invest in exchange for a share of the ownership. Venture capital firms have access to the money and expertise many growing firms need to reach their potential. Venture capital firms bring both capital and expertise to the business, they often place their industry experts in control of their target firms. Venture capitalists exit the firm once it starts turning a profit.
This is an arrangement whereby the business sells its account receivables/debtors at a discount. In this arrangement, the buyer, who is known as the factor, collects the money from the debtors on behalf of the business and charges a premium for this service. If the debtor does not pay for any reason, the factor can get back to the business for the payment.