Page 50 - Business_Studies_F5

Student's Book Form Five

External sources of finance occurs when the existing shareholders or
External funding of a business refers to business owners lose part of control over the
finances provided by individuals or group business in case the new shareholders have
of people outside the business venture. come with new interests and preferences.
These include share capital, venture capital, It also leads to a loss of business secrecy
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overdrafts, secured loans, debentures, as the new shareholders gain portion of
crowd funding and grants. ownership and control of the business.

Share capital Venture capital

Share capital also known as equity finance, Venture capitalists are professional
is one of the ways of financing medium- investors who may be wealthy investors,
sized businesses mostly used by new investment banks, or other financial
business enterprises. Share capital refers to institutions. Depending on the stage of
the means of raising capital by selling shares business enterprises, they can have 25 per
to investors. The business increases finance cent to 50 per cent of ownership in invested
by its capital through selling ownership businesses. Venture capital financing is a
(share) to investors. Shareholders are way of raising funds from private equity
given rights to ownership and may have investor (s) or venture capitalists for
control in the management of the business. business enterprises with high growth
Shareholders receive dividends and capital potential in exchange for equity. Venture
gain (capital growth) as returns of their capitalists expect to get above-average
investment in the business. returns from their investments; hence,
they invest in high-risk and potentially
Share capital benefits businesses by high-return businesses. Venture capital
allowing an enterprise to raise finance funding is suitable for new and growing
without incurring debts as there is no business enterprises which seek large
payment of interest that adds the cost amounts of capital and have high growth
of the finance like bonds and loans. potentials.
Share capital enables the medium-sized
businesses to raise substantial amount In addition, venture capitalists’ investments
of finance to undertake its operations. in business enterprises may not necessarily
Moreover, this approach brings in new be financial as venture capitalists may
shareholders who may add on valuable provide technical and managerial expertise
expertise to the business operations and as well as business connections to guide
meeting various expenditures. Despite business enterprises. Venture capitalists
the advantages of share capital financing, can finance a business enterprise until the
selling of shares to raise business finance business generates returns on invested
usually results in ownership dilution for capital. Returns for venture capitalists
existing shareholders. Ownership dilution may be generated through selling of their

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