Page 209 - F1 - AB Integrated Workbook STUDENT 2018-19

Accounting and finance functions within business

4.2 Evaluating and obtaining finance

The organisation may need additional funding to allow it to grow and invest in new
projects. It therefore may need to raise finance from external sources.

There are two main types of external finance.

Debt Equity

This involves borrowing cash This involves selling a stake in
from a third party and promising the business in order to raise

to repay them at a later date. cash.
Normally the company will also

have to pay interest on the Advantages:
amount borrowed.

 no minimum level of
Advantages: dividend that must be paid
to shareholders. Interest
 interest payments payments on debt finance
allowable against tax must be paid each year

 does not change  a bank will normally require
ownership of the security on the company’s
organisation assets before it will offer a
loan. Some companies
 tends to be cheaper to may lack quality assets to
service than equity as it is offer, making equity more
often secured against attractive as it does not
assets of the company and require security.
take priority over equity in

the event of the business
being liquidated.

 Job security

The treasury and finance function will weigh up which source of finance best suits the
circumstances of the business.

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