Analysing Long Term External Finance for Business: A Detailed Report

This report provides an analysis of long-term external finance options available to both unincorporated (sole traders and partnerships) and incorporated (private and public limited companies) business entities. It differentiates between internal and external sources of funds, focusing on long-term options such as equity shares, debentures, and term loans. The report highlights that unincorporated businesses cannot raise capital by selling shares or debt securities, relying instead on personal guarantees and government grants. In contrast, incorporated businesses can issue shares, with public companies having the option of IPOs. The report also distinguishes between equity capital and debt capital, noting the tax efficiency of debt and the absence of mandatory dividend payments for equity. It concludes by emphasizing the importance of selecting the right funding source to ensure smooth business operations and viability.

Accounting for
business

Table of Contents
INTRODUCTION ..........................................................................................................................3
MAIN BODY...................................................................................................................................3
Unincorporated businesses (sole traders and partnerships)........................................................3
Incorporated businesses (private and public limited companies)...............................................4
CONCLUSION ...............................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
Accounting for business explains how the transactions are being recorded and how the
financial information is understood and organised by businesses. Accounting is about getting a
clear view and understanding of financial position of business. It tells whether the business is
making profit or not, information about the cash flow, the current position of business' assets and
liabilities and about the parts of business which are making more money and profit
(Blommestein). This report analyses the external long term finance available for unincorporated
and incorporated business entities. The report further elaborates the various external long term
sources and similarities and dissimilarities among them with regards to partnership, sole traders,
public and private companies.
MAIN BODY
External sources of funds are those type of sources by which finance is raised from
outside the entity. For instance, reserves is an internal finance source, whereas the loans from
bank is an external source of finance. On the time period length basis, the sources are divided
into long term and short term sources of finance. Long term sources of finance includes equity
shares, debentures, term loans, venture capital, etc. Short term sources includes bank overdraft,
working capital loans, trade credit, debt factoring, etc.
Incorporated and unincorporated business entities: When a company has an entity separate
from its owner and has natural rights to it, it is known as an incorporated business entity. When
the owner of the company and the entity are the same and all consequences are the personal
responsibility of the owner, this type of entity is known as an unincorporated entity. This type of
companies are typically single owners or partnerships. The fundamental difference between an
incorporated and unincorporated company is how the owner takes over the company's activities
(El-Abbasy and Zayed, 2020).
Unincorporated businesses (sole traders and partnerships)
Unincorporated entities such as sole proprietorships and partnerships, cannot raise capital
by selling shares. They also cannot sell debt securities. They can borrow money from family and
friends, or use the owner's profits and savings. Partners must raise additional capital. Lenders are

reluctant to lend to small businesses unless the owner provides a personal guarantee backed by
their assets. Government grants are offered to support new and small businesses.
Distinction between borrowed capital and capital from owners
Capital from owners is the money invested in the company by the company's internal
managers such as owners and shareholders. Debt capital is capital raised by a company such as
bank loans, borrowings and corporate bonds taken out by financial institutions and banks. The
owner's capital is permanently invested in the company. Debt equity is invested over a period of
time. The reward for the owner's invested capital is the annual profit and this capital stays with
the company. By contrast, loans must be repaid, whether these companies are sole
proprietorships or partnerships, making a profit or making a loss. Debt equity is tax efficient
capital compared to all forms of equity (Ferraris and Couturier, 2018).
Incorporated businesses (private and public limited companies)
When a company has an entity separate from its owner and has natural rights to it, it is
known as an incorporated business entity. Small businesses consider incorporation for specific
reasons consisting of expansion or liability protection (Khattak and Clauß, 2021).
A distinction between two long-term sources of capital: equity capital and other forms of
debt capital (bank loans and debt securities)
Shares are issued by a limited liability company to raise corporate capital from the
market. The company sets limits on maximum authorized share capital in its Memorandum of
association. The paid-up share capital is shown in particular on the company's balance sheet. A
private limited company is prohibited from selling its shares to the public. They can invest their
own capital, funds provided by friends and family, or borrow from financial institutions. Public
companies are not prohibited from selling their shares to the public. They issue shares on public
exchanges and the first offering is called IPO. Share capital is a permanent form of capital as it is
not repaid until the company is liquidated (Maher and Aquanno, 2020). No interest payments.
Income from holding shares comes in the form of dividends. The amount of the dividend is
determined based on the profit generated by the company. The risk associated with this type of
source is that the company's ownership may be diluted to some extent, which can be good or bad

for the business. Companies that haven't made a profit in a year can refrain from paying
dividends. This is an advantage associated with this type of funding. Debenture is the long-term
sources of debt issued by private companies to raise funds. They are usually issued at higher
interest rates and are unsecured. This is a risky means of borrowing money. Debt securities are
included on the balance sheet under the long-term debt heading. Debt securities pay investors a
regular interest rate or yield. In case of liquidation or bankruptcy, the bonds are paid out in front
of the shareholders.
CONCLUSION
The above report concluded that determining the appropriate source is a critical business
decision made by the head of financial management. Choosing the wrong source can increase
costs and directly affect the viability of your project. Wrong decisions can affect smooth
business operations. Business organizations have different sources of funding to start their
business, or expanding the business or even the mergers. The report has explained the various
sources that are available to incorporated and unincorporated business enterprises. It has also
clearly explained the similarities and dissimilarities in raising the finance from different type of
sources.

REFERENCES
Books and Journals
Blommestein, H.J., PART III Creating a Sound Financial Structure. In Building Sound Finance
in Emerging Market Economies. International Monetary Fund.
El-Abbasy, M.S. and Zayed, T., 2020. Finance-based scheduling multi-objective optimization:
Benchmarking of evolutionary algorithms. Automation in Construction, 120. p.103392.
Ferraris, A. and Couturier, J., 2018. Big data analytics capabilities and knowledge management:
impact on firm performance. Management Decision.
Khattak, M.S. and Clauß, T., 2021. The role of entrepreneurial finance in corporate social
responsibility and new venture performance in an emerging market. The Journal of
Entrepreneurship, 30(2). pp.336-366.
Maher, S. and Aquanno, S.M., 2020. A New Finance Capital? Theorising Corporate Governance
and Financial Power. In Rudolf Hilferding (pp. 129-154). Palgrave Macmillan, Cham.