Analysis of External Finance Options: Sole Trader vs Company

This report provides an overview of external finance sources available to businesses, comparing options for sole traders, partnerships, and companies. It discusses long-term bank loans, share capital (specifically for public limited companies), government grants and subsidies, and venture capital. The report highlights the similarities and differences in accessing these financial resources based on the business structure. It concludes that external finance sources play a crucial role in business development by facilitating the raising of funds for production and other business activities.

OTHER MANAGEMENT

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
CONCLUSION................................................................................................................................3
REFERENCES................................................................................................................................4

INTRODUCTION
The external source of finance is referred to the money invested by the outside source in the
company. This report will discuss the external sources of finances available to the company and
will examine the difference and similarities that have in the context of the sole trader, partnership
and the companies.
MAIN BODY
External source of finances are defines as the money coming in the business from the
outside environment. This help the businesses to boost the development process in the
organization. Long term source of finances are referred to the finances that has been invested for
the period of over five years. The external source of the finances are as follows-
Long term bank loans-
Bank loans are provided to both the unincorporated and the incorporated companies in
the market. These are provided at regular interest payments to the companies. Generally bank
loans are provided as an unsecured loan which means company does not need to mortgage
companies property to the bank. Loans must be repaid on time otherwise banks are open to take
legal action against the companies. The loans are provided to every business structure be it sole
trader, partnership or the company. Only major difference while providing loans to different
business structure is that the business charge interest amount according to the capital requirement
of the business. The more the business loan amount is, the less the interest is to be paid by the
business (Haralayya, 2021).
Companies are in major profit while taking bank loans as they are the ones who generally
borrow big amount of borrowing from the company. Further, bank loans does not create any
ownership right means bank is nowhere responsible for the operations of the business and banks
does not interfere in the affairs of the business.
Share Capital-
Share capital is the another source of finance that can be raised by the company as a long
term external source of finance (Borisovna, 2020). Sole trade, partnership and private limited
companies are not allowed to raise share capital but for public limited companies share capital
can be raised from the public by issuing share on the stock exchange. These simply means that

the original shareholders of the company dilute their percentage of the ownership to the other
investors that are investing in the company.
Share capital is the permanent source of finance and is never paid back to the investor
until company liquidates. Companies are not even liable to pay regular interest to the share
capitalist. Not only this the share capitalist brings their experience in the company which can be
helpful for the companies in order to increase its profitability in the market. Company offer
dividend to the shareholders based on the profits of the company as in the last year. There are
times when firm don't pay dividend when company is unable to raise profit in that year. Further,
shareholders can only sale their shares to the another investor who is interested in the company
and is prepares to buy the stocks on the stock exchange.
Government grants and subsidies
Grants and subsidies are offered by the government at different levels like local, national,
various firms are able to avails this finance source. Whereas subsidies are the payment which
aims to influence the process of manufacturing and grants are financial contributor for certain
activities which is incorporated by policies (Podsiadło, 2018). Within the principle grants and
subsidies are not required to be repaid to grantor, instead it defines that grantee complies within
the contractual term. Subsidies and grants does not need to cover price structure of project that
implies that beneficiary firms can easily secure their finance for project either with their own
equity or cooperation from third party like bank. Sole traders, partnerships and companies can
easily avail the government grants and subsidies at their initial phase of business to establish it.
One of the major benefit of this finance source is that grant is never asked for repaid, it is
considering as the services or donation from the government side. Where subsidy is a single
lump sum that is provided by the government to the industry, it is granted to industry that is
considered as important within the national interest (Méndez-Morales and Muñoz, 2019).
Government subsidies helps the industry by granting the amount for their production process of
goods and services, they offer the tax credits and reimbursements.
Venture capital
It is considering as the private equity and kind of financing which is provided by the investors to
new companies. Generally, they raise the funds for business in their initial stage. Investors
supports the business which is deemed to have better growth potential. Main purpose of this is to

responsibly develop returns for the limited partners by serving entrepreneurs. Venture capital
usually comes from investment banks, well investors, and other finance premises. Moreover, it
does not always concern with the monetary benefit, it also comprises of technical and other
managerial expertise (Fu, Harrison and Li, 2022). It is generally allocated to the small
companies with exceptional success potential. Companies can use this type of finance resource
as from this huge amount of capital can easily raise, it also provides the risk management
cooperation, there is no such monthly payments. Additionally, there is no need for pledging the
personal assets, in this network facilities are provided. But its drawback is that investors can own
stake in business, overall cost for financing is high and there is requirement of extensive due
diligence. Sole traders, partnership and companies can allow to use venture capital finance
source to raise fund for their business activities.
CONCLUSION
From the above it has been concluded that finance sources play a crucial role in business,
they make the firms to raise fund for their production process and other business activities.
Above have discussed the different external sources of finance where it highlighted the major
share capital, long term bank loans, government grant and subsidies and also discussed the
venture capital source.

REFERENCES
Books and Journals
Borisovna, I.T., 2020. Shareholders’ equity consists of share capital and retained earnings. The
share capital is the value of funds that shareholders have invested in the company. When
a company is first formed, shareholders will typically put in cash. БАЛКАНСКО Н А
У Ч Н О ОБОЗРЕНИЕ, p.81.
Fu, X.M., Harrison, R.T. and Li, D.F., 2022. Venture capital investment in university spin-offs:
Evidence from an emerging economy. Journal of Corporate Finance. 74. p.102197.
172.pp.160-170.
Haralayya, B., 2021. Loans And Advances with Reference to PKGB Bank. Iconic Research And
Méndez-Morales, E.A. and Muñoz, D., 2019. Input, output, and behavioral additionality of
innovation subsidies. Journal of technology management & innovation. 14(4). pp.158-
172
Podsiadło, P., 2018. Grants and tax subsidies as the main forms of state aid–a perspective of the
state of public finance. Optimum. Economic Studies. (2 (92)). pp.90-109. Engineering
Journals, 5(1),