Accounting for Business: External Finance and Business Structures

This report provides a comprehensive analysis of external sources of long-term finance available to different forms of business organizations, including sole proprietorships, partnerships, private limited companies, and public limited companies. It explores various funding avenues such as bank loans, loans from friends and family, overdrafts, share issues, venture capital, angel investors, new partners, leasing, and trade credit. The report details how each source is utilized by different business structures, considering the costs and implications associated with each. Furthermore, it evaluates these sources from a long-term perspective, comparing their advantages and disadvantages in terms of ease of access, cost-effectiveness, and suitability for different financial needs, ultimately concluding that management must carefully analyze each source before making financial decisions based on the unique characteristics of each business.

ACCOUNTING FOR
BUSINESS

Table of Contents
INTRODUCTION.......................................................................................................................................3
MAIN BODY..............................................................................................................................................3
Analysis of sources of external sources of long term finance available with different forms of business
organisation.............................................................................................................................................3
Evaluation of sources of finance from external sources for long term perspectives...............................4
CONCLUSION...........................................................................................................................................5
REFERENCES............................................................................................................................................6

INTRODUCTION
External sources of obtaining finance is considered to be the most important source for
modern businesses in acquiring their regular finance (Zetlin-Jones and Shourideh, 2017). It refers
to obtaining funds from outside the business for which business’s owner needs to pay something
in the form of cost of capital. It includes various sources such as bank loans, loans from family
and friends, overdrafts, issue of shares, venture capitalists and angel investors, new partners,
leasing and trade credit (Vaznyte and Andries, 2019). These sources are generally used by
businesses depending upon their structure like sole proprietorship, partnership, private and public
limited companies (Kumar and et.al., 2020). So, in this report all the above mentioned external
long term sources of finance will be discussed which has been used by different form of
businesses to meet it financial needs and also these sources will be evaluated in terms of its
similarities and differences.
MAIN BODY
Analysis of sources of external sources of long term finance available with different forms of
business organisation
Sole proprietorship or sole traders: These forms of business organisation are generally of small
size compared to other forms of businesses. The single or sole owner of the business used to
manage the finance of the business and provided for the same (Masiak and et. al., 2017). The
various external sources used by the sole trader or proprietor or owner are bank loans, overdraft
facilities, loan from friends and relatives and trade credit. Long terms sources of finance are
generally obtained through bank loans on which interest must be paid on a regular basis. This
interest amounts to cost incurred for obtaining finance (Best, 2018).
Partnership business: This is a form of business organisation in which two or more person
agreed on certain terms towards carrying out business activities. The terms so agreed upon are
usually related to the share of capital and profit. This share of capital by the partners is known as
internal source of finance for the partnership business (Jakubová, 2019). For external sources of
finance, partnership business generally are dependent upon including more partners to obtain
new capital in the form of their capital contribution in the partnership business and for this,
the cost that businesses are generally required to pay is giving certain share of profit to the new

partner on the basis of agreed profit sharing among the new firm and also sometimes the
involvement of more partners leads to dilution of ownership in the partnership business (Hagen,
Bergh and Christensen, 2018). Another source from which partnership firm used to raise their
finance for long term need is external loans (Mittal and Raman, 2021). External loans includes
all type of obligatory payment that are going to become due for payment after certain period of
time and on the amount of borrowed fund businesses like partnership firms needs to regularly
service this loan amount in the form of paying interests. Sources like venture capital and angel
investors are also sometimes referred by partnership firms in order to obtain long term finance
from external sources (Park, 2017).
Private limited companies: This form of business organisation does have its stocks listed on any
of local, regional or national stock exchange and thus its shares are not traded publicly (Cole,
Cowling and Liu, 2021). There are various external sources of finance for long term purpose
available to this form of business organisation which are as follows:
Bank loans are majorly used by financing long term proposal of the company through external
sources, where interests are payable on regular interval along with the repayment of principal
amount as agreed upon between the financial management of the company and lending banks
and financial institutions (Naulin, 2020).
Business angels and venture capitalists are another good source of finance from external
source for long term purpose where they before investing into the company thoroughly analyze
the proposal and then provide finance in generally in return of certain share in the business
(Bilgin and Dinc, 2019).
Another source like shares issue, but in case of private limited company such issue of shares and
ownership extension through equity shares can be done to the maximum number of shareholders
up to 50 only and then the remaining amount can be borrowed through the issue of preferred
stock and issuing bonds and debentures in the market (Yazdanfar and Öhman, 2017). Bonds and
debentures are small units of debt capital where a fixed or fluctuating rate of interest is payable
on the borrowed amount by the businesses on a regular basis till the amount remain invested in
the business.

Public limited companies: This form of business organisation is different from the previous one
in the sense that it has its stocks listed on the stock exchanges and thus are available for trading
in the open market (Maitlo and et.al., 2019). Shareholders can buy or sell their share any time
they wish to do so. Talking about its access to external sources of finance for raising long term
capital, it has much broader scope for generating finance from external sources and thus highly
rely upon the same for their long term financial needs (Begenau and Salomao, 2019).
Loan from financial institutions and banks, share issue through both equity and preferred stock,
business angels and venture capitalists, asset financing, leasing or hire purchase and bonds and
debentures are some of the most common sources of finance relied upon by public limited
companies (Cegielska, 2020). The major difference lies between private and public limited
companies in terms of raising long term finance from external sources is in obtaining capital
through the issue of equity shares (Goh and et.al., 2017). As in case of private limited companies
this source can be utilized in a very narrow scope but in case of public limited companies, issue
of equity share for additional capital is considered as a major and best source of obtaining long
term finance from external source (Becker and et.al., 2020).
Evaluation of sources of finance from external sources for long term perspectives
On comparison, it has been identified that for a medium term or not very long term if finance is
required then the same can be obtained through banks in the form of loans or any financial
institutions as it is quite easy and less expensive to get capital from this source while for a very
long term share issue is better to be resorted to due to its cheaper way of providing finance for
long term (Belo, Lin and Yang, 2019).
CONCLUSION
From the above report it has been concluded that there are many external source available
through which funds can be raised for long term perspectives but its advantage and disadvantage
differs for different forms of business organisation as they differ in terms of size, nature and
structure from each other, so management must first analyze each source in all aspects before
selecting it for raising funds (LERPOLD and TENGELIN, 2019).

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