U4.06 — Sources of External Funding
Overview
Dotpoint 6: sources of external funding.
External funding refers to finance obtained from outside the business. This may come from investors, suppliers, lenders, financial institutions or government programs.
External funding can help a business expand into global markets when internal funding, such as retained profits, is not enough. It can provide the money needed for equipment, overseas marketing, staff, production, inventory, warehouses, export contracts and international operations.
This dotpoint will focus on seven different types of external funding:
- debentures
- share capital
- trade credit
- venture capital
- secured loans
- financial institutions
- government
📜 Debentures
What are debentures?
Debentures are a long-term source of external debt finance where a company borrows money from investors and agrees to pay them interest.
A simple way to think about a debenture is this: instead of the business going to one bank for a loan, it borrows money from a group of investors. Each investor lends money to the company and receives regular interest payments. At the end of the agreed period, the company is expected to repay the original amount borrowed.
Debentures are different from shares because investors are lenders, not owners. This means debenture holders do not usually receive voting rights or part ownership of the business.
In Australia, larger companies and financial institutions often raise debt through notes, bonds or capital notes, which are similar to debentures. Examples include NAB and Westpac, which have issued notes to raise finance from investors.
Impact on global business expansion
Debentures can help fund large expansion projects because they can raise significant amounts of long-term finance without issuing shares or giving up ownership.
A business could use debenture finance to purchase manufacturing equipment, expand production capacity, build export facilities or fund large-scale international growth.
However, debentures create a debt obligation. The business must pay interest and eventually repay the amount borrowed, which can place pressure on cash flow if overseas expansion is slower than expected.
Benefits and limitations of debentures
| Benefits | Limitations |
|---|---|
| Can raise large amounts of long-term finance for major expansion projects. | The business must pay interest, even if profits fall. |
| Existing owners do not lose ownership or voting control. | Debt repayments can reduce cash flow and increase financial risk. |
| Can be useful for established companies with a strong reputation. | May be difficult for small or new businesses to attract investors. |
Example of how to write this in an exam
Debentures are a source of external debt funding where a company borrows money from investors and agrees to repay the amount with interest. For example, a large Australian business such as NAB or Westpac can raise finance through notes or similar debt securities, while an established manufacturing company could use debenture-style finance to fund equipment for export growth. This allows the business to raise money without giving up ownership, but it must manage interest payments and repayment risk.
📈 Share capital
What is share capital?
Share capital is money raised by selling shares in a company to investors.
A share represents part ownership of a company. When investors buy shares, they provide finance to the business. In return, they may receive dividends if the company distributes profits, and they may have voting rights depending on the type of shares issued.
For a private company, share capital may come from a small group of owners, family members, private investors or business partners. The shares are not sold openly on the stock exchange.
For a public company, share capital can be raised from a much larger group of investors by issuing shares through the Australian Securities Exchange (ASX). For example, Australian public companies such as Qantas, BHP and JB Hi-Fi are owned by shareholders who have bought shares in the company.
Impact on global business expansion
Share capital can provide a large amount of funding for global expansion without requiring regular interest repayments.
This can be useful when a business needs finance for overseas warehouses, technology, marketing, new stores, inventory or production capacity.
However, issuing shares can reduce the control of existing owners because new shareholders gain ownership rights and may expect dividends or influence over business decisions.
Benefits and limitations of share capital
| Benefits | Limitations |
|---|---|
| No compulsory interest repayments, which can protect cash flow. | Existing owners may lose some control of the business. |
| Can raise significant finance for large global expansion projects. | Profits may need to be shared with new shareholders through dividends. |
| Can strengthen the business’s financial position by increasing equity. | Issuing shares can be complex and may not suit smaller proprietary companies. |
Example of how to write this in an exam
Share capital is finance raised by selling shares in a company to investors. For example, Qantas could raise share capital by issuing shares to investors to help fund aircraft upgrades, technology or international route expansion. This would give the business finance without regular interest repayments, but it may reduce the control of existing owners and require future profits to be shared with shareholders.
🧾 Trade credit
What is trade credit?
Trade credit is a source of external funding where a supplier allows a business to buy goods, materials or inventory now and pay for them later.
It is not a bank loan. Instead, it is credit provided by a supplier. For example, a supplier may allow the business to receive stock today but pay the invoice in 30, 60 or 90 days.
Trade credit is commonly used for inventory, raw materials, ingredients, packaging, spare parts or stock. It can be especially useful for businesses that need to buy inputs before they have received money from customers.
The key idea is that trade credit helps the business manage cash flow, because cash does not leave the business immediately.
Impact on global business expansion
Trade credit can help a business manage cash flow when expanding because it allows the business to obtain stock, ingredients or supplies before paying the supplier.
This can be useful when a business is importing materials or preparing for export orders because it may sell products before the supplier payment is due.
However, trade credit can damage supplier relationships if payments are late. It may also be limited if suppliers do not trust the business or if the business is new to an overseas market.
Benefits and limitations of trade credit
| Benefits | Limitations |
|---|---|
| Improves short-term cash flow because payment is delayed. | Late payment can damage relationships with suppliers. |
| Can help the business buy stock or materials before revenue is received. | Suppliers may refuse credit or offer only small amounts to new businesses. |
| Often easier and quicker than applying for a loan. | Discounts may be lost if the business delays payment. |
Example of how to write this in an exam
Trade credit is a source of external funding where a supplier allows a business to purchase goods now and pay later. For example, Apple could use trade credit with component suppliers to receive parts for iPhones before payment is due. This could help cash flow when producing goods for global markets, but late payment could damage supplier relationships and reduce future access to credit.
🚀 Venture capital
What is venture capital?
Venture capital is finance provided by investors to businesses with high growth potential, often in exchange for part ownership of the business.
It sounds similar to share capital because both involve investors receiving ownership. However, venture capital is usually more specific. It often involves specialist investors putting money into early-stage, innovative or fast-growing businesses that they believe could become much larger in the future.
Venture capital is most common for startups, technology businesses, software companies, online platforms, biotechnology businesses and other innovative businesses that can scale quickly across markets.
Venture capitalists often provide more than money. They may also provide advice, mentoring, networks, strategic guidance and connections to other investors or overseas markets.
Australian examples linked to venture capital include Canva, SafetyCulture, Culture Amp and other high-growth startup businesses supported by venture capital firms such as Blackbird Ventures.
Impact on global business expansion
Venture capital can help a business expand globally by providing a large injection of funds for rapid growth, technology development, marketing, hiring and international market entry.
It can also provide strategic support and business networks that help the business scale into overseas markets more quickly.
However, venture capital usually means giving up some ownership and control. Investors may expect fast growth, strong returns and influence over strategic decisions.
Benefits and limitations of venture capital
| Benefits | Limitations |
|---|---|
| Can provide large amounts of funding for rapid growth. | The original owners usually give up part ownership. |
| Investors may provide expertise, networks and mentoring. | Investors may pressure the business to grow quickly or change strategy. |
| Useful for innovative businesses with global potential. | Not usually available to ordinary small businesses with limited growth potential. |
Example of how to write this in an exam
Venture capital is external funding provided by investors to businesses with high growth potential, usually in exchange for part ownership. For example, Canva received early venture capital support from Blackbird Ventures, helping it grow from an Australian startup into a global technology brand. This type of funding can support rapid global expansion because it provides money, advice and networks, but the owners may give up some control to investors.
🔐 Secured loans
What are secured loans?
Secured loans are loans backed by an asset used as security or collateral.
This means the business borrows money from a lender, such as a bank or finance company, and promises that an asset can be used to protect the lender if the loan is not repaid. Assets used as security may include property, machinery, vehicles, equipment or other valuable business assets.
Because the lender has security, secured loans may allow the business to borrow a larger amount or receive a lower interest rate than an unsecured loan. However, the risk is serious: if the business cannot repay the loan, the lender may be able to take and sell the secured asset.
Impact on global business expansion
Secured loans can help a business access larger amounts of finance because the lender has the protection of an asset as security.
This can be useful for funding overseas warehouses, manufacturing equipment, vehicles, technology, inventory or international expansion costs.
However, secured loans increase risk because the business may lose the asset if it cannot make repayments. This can be dangerous if global expansion does not generate revenue quickly enough.
Benefits and limitations of secured loans
| Benefits | Limitations |
|---|---|
| May allow the business to borrow larger amounts of money. | The business risks losing the secured asset if it cannot repay. |
| May have lower interest rates than unsecured loans because the lender has security. | Regular repayments can reduce cash flow. |
| Useful for purchasing major assets such as equipment, vehicles or property. | The approval process may require detailed financial records and asset valuations. |
Example of how to write this in an exam
Secured loans are loans backed by an asset, such as property, equipment or vehicles. For example, Cochlear could use a secured loan to purchase specialist manufacturing equipment for overseas growth, using existing equipment or property as security. This may allow the business to access a larger loan, but it increases risk because the lender may take the secured asset if repayments are not made.
🏦 Financial institutions
What are financial institutions as a source of external funding?
Financial institutions are organisations that provide financial services such as loans, overdrafts, asset finance, trade finance, foreign exchange services and working capital finance.
In this syllabus, financial institutions include banks and finance companies that businesses can approach for external funding, as covered in U4.04.
Impact on global business expansion
Financial institutions can help fund global expansion by providing loans, overdrafts, equipment finance, trade finance, invoice finance, export loans, bank guarantees and foreign exchange services.
This can help a business pay for overseas warehouses, stock, equipment, suppliers, staff, logistics and export contracts.
However, financial institutions usually require evidence of strong cash flow, security, credit history and repayment ability. Borrowing also increases debt and interest costs.
Australian examples
Banks
Commonwealth Bank, Westpac, ANZ, NAB and Macquarie Bank can provide business loans, overdrafts, payment services, foreign exchange and trade finance.
Finance companies
ScotPac, Prospa, Liberty, Pepper Money and Money Tech can provide specialised business finance such as asset finance, invoice finance and working capital.
Export Finance Australia
A specialist Australian Government finance provider that supports export businesses through products such as loans, bonds and guarantees.
Benefits and limitations of financial institutions
| Benefits | Limitations |
|---|---|
| Can provide large and structured finance for expansion. | Borrowing creates interest costs and repayment obligations. |
| Can offer specialist support such as trade finance, foreign exchange and guarantees. | Approval may require strong financial records and security. |
| Can be useful for importing, exporting and managing international transactions. | The business may become more exposed to financial risk if expansion fails. |
Example of how to write this in an exam
Financial institutions are external funding providers such as banks and finance companies. For example, JB Hi-Fi could use finance from a bank to fund inventory, technology upgrades or overseas supplier payments if expanding into new markets. This could provide more finance than retained profits, but the business would need to manage interest repayments, debt and cash flow carefully.
🏛️ Government
How can government provide external funding?
Government funding refers to financial support provided by government bodies to help businesses grow, export, innovate or enter international markets.
This can include grants, subsidies, loans, guarantees, tax incentives or export assistance programs. Government funding is external because the money or support comes from outside the business.
For global business, government funding is often linked to export promotion, international marketing, innovation, trade shows, market research or reducing the financial risk of entering overseas markets.
More detail on government incentives for international trade can be found in U3.05.
Impact on global business expansion
Government funding can help businesses expand globally by reducing the cost and risk of entering overseas markets.
For example, government support may help fund export marketing, overseas promotion, trade shows, market research, innovation, export contracts or international finance gaps.
However, government funding often has eligibility rules, application processes, reporting requirements and limits on what the money can be used for.
Australian government examples
EMDG
The Export Market Development Grants program can support eligible Australian SMEs with export marketing and promotional activities.
Export Finance Australia
Supports Australian businesses pursuing global opportunities through finance solutions such as loans, bonds and guarantees.
Benefits and limitations of government funding
| Benefits | Limitations |
|---|---|
| Can reduce the cost and risk of entering overseas markets. | Eligibility requirements may be strict. |
| May not require ownership to be given up. | Applications can take time and funding may not be guaranteed. |
| Can support export marketing, finance gaps and international growth. | Funding may be limited to specific activities and require reporting. |
Example of how to write this in an exam
Government funding is external finance or support provided by government bodies, such as grants, loans, guarantees or export assistance. For example, an Australian business such as Canva could seek government support to help fund international promotion, innovation or entry into new overseas markets. This can reduce the cost of expansion, but the business must meet eligibility rules and funding may not cover all costs.
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🃏 Flashcards
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🎮 Revision Games
💰 BME Millionaire
Climb the prize ladder. Use your lifelines wisely.
👔 Business Boss
Make 10 funding decisions. Balance access to finance, cash flow, control and risk.
⚡ 60 Second Showdown
A varied 60-second challenge covering external funding sources, benefits and limitations.
Biz Fact: Canva got its start with just $250,000 in venture capital from Blackbird Ventures — that early investment later grew to be worth more than $650 million.
Past Exam Questions
Use these past exam questions to see how this dotpoint has been assessed. Pay close attention to the command term, the number of marks and whether the question is Section 1 or Section 2.
Section 1 Questions
2017 — Section 1 — Question 4(c) — External finance part only — 2 marks
Context
Business operation in global markets requires knowledge of different business practices and legal systems.
4(c): Describe one source of external finance available to Australian companies. (2 marks)
Command term focus: Describe
Describe: give the main characteristics or features of the external funding source.
See the full command term guide here: Command Terms.
4(c) Sample answer
One source of external finance is a secured loan. This involves a business borrowing money from a lender, such as a bank, and using an asset as security. The business can use the loan to fund expansion, but if it cannot repay the loan, the lender may take the secured asset.
2022 — Section 1 — Question 3(c) — 6 marks
Context
Finance is an important aspect for a business to consider when starting up or expanding.
3(c): Describe each of the following sources of external funding. (6 marks)
Debentures:
Share capital:
Trade credit:
Command term focus: Describe
Describe: give the main characteristics or features of each funding source clearly and directly.
See the full command term guide here: Command Terms.
3(c) Sample answer
Debentures: Debentures are a source of external debt finance where a company borrows money from investors and agrees to repay the amount with interest. Debenture holders are lenders, not owners, so the business can raise finance without issuing shares.
Share capital: Share capital is finance raised by selling shares in a company to investors. This provides money for the business, but investors gain part ownership and may receive dividends or voting rights.
Trade credit: Trade credit occurs when a supplier allows a business to buy goods or materials now and pay later. This helps the business manage cash flow because it can receive stock or materials before paying the supplier.
2024 — Section 1 — Question 6(a) — 6 marks
Context
A company that specialises in the manufacture of technology products is planning to expand its operations globally. As part of its strategic planning, the company is considering various sources of external funding and means of navigating the potential political landscape.
6(a): Explain the following sources of external funding for the company to consider. (6 marks)
Venture capital:
Secured loans:
Command term focus: Explain
Explain: show cause and effect by explaining how each funding source could support expansion and the result.
See the full command term guide here: Command Terms.
6(a) Sample answer
Venture capital: Venture capital is funding provided by investors to businesses with high growth potential, often in exchange for part ownership. This could help the technology company fund product development, international marketing and overseas staffing. As a result, venture capital may support fast global expansion, although the original owners may lose some control.
Secured loans: Secured loans are loans backed by an asset used as security. This could help the company borrow money to purchase technology equipment, manufacturing machinery or overseas facilities. As a result, the company may be able to fund global expansion, but it risks losing the secured asset if it cannot repay the loan.
Section 2 Questions
2018 — Section 2 — Question 9(a) — 6 marks
Case study / context
My Ethical Eats Ltd manufactures clean and healthy food products for restaurants in the Fremantle and Perth areas. It specialises in cold beverages and manufactures a range of snack foods, soups and healthy frozen meals. The business has an excellent reputation for using locally-sourced organic products and implementing ethical work practices. My Ethical Eats Ltd is recognised by its bold packaging and simple, colourful logo.
The business is growing and the owners are considering purchasing new manufacturing equipment to cater for the increase in demand for their food products. The new equipment would meet local production needs as well as providing for future expansion overseas. The funding of the new manufacturing equipment has caused cash flow concerns for the owners. In addition, the growing demand for the company’s products has raised some concerns, including the maintenance of the company’s reputation for producing high-quality products and ethical work practices throughout this expansion.
9(a): Outline three sources of funding that could be suitable for the purchase of the new manufacturing equipment. (6 marks)
Command term focus: Outline
Outline: state each suitable funding source and briefly clarify how it could fund the equipment.
See the full command term guide here: Command Terms.
9(a) Sample answer
One suitable source of funding is a secured loan. My Ethical Eats Ltd could borrow money from a financial institution and use an asset as security. This would help the business purchase the new manufacturing equipment, although it must make regular repayments and risks losing the asset if it cannot repay the loan.
A second suitable source is trade credit. Suppliers may allow My Ethical Eats Ltd to purchase ingredients, packaging or equipment-related materials now and pay later. This could reduce immediate cash flow pressure while demand is increasing.
A third suitable source is share capital. My Ethical Eats Ltd could raise money by selling shares to investors. This would help fund the equipment without regular interest repayments, although existing owners may lose some control and need to share future profits.
2020 — Section 2 — Question 7(a) — 8 marks
Case study / context
Tartology Ltd is a Western Australian business that specialises in manufacturing premium handmade chocolate tarts using locally-sourced ingredients. Founded in 2013, Tartology Ltd initially began as a home-based business and opened its first store in 2015. Over the past five years, Tartology Ltd has expanded both its business and the range of chocolate tarts it sells. At present, Tartology Ltd sells through various retail stores across Australia and through its website and Instagram page.
The increasing popularity of the chocolate tarts within both Western Australia and Australia has seen a huge growth in Tartology Ltd’s customer base, sales and profits. Tartology Ltd has been analysing the current economic climate and is now considering entering the New Zealand market. It is seeking to buy a warehouse facility in New Zealand which will focus on the production of tarts to sell to various patisseries in large cities. Ethical practice is important to Tartology Ltd, so it is keen to employ a diverse range of employees in its warehouse and to connect with the local community.
Tartology Ltd believes that moving into the New Zealand market is a good business decision due to that country’s growing middle-income population. This would mean an increase in the number of people who can afford to spend money on luxury items such as Tartology Ltd’s chocolate tarts. There are also good trade relations between Australia and New Zealand and the Australian dollar is relatively close in value to the New Zealand dollar. Interest rates in Australia are at an all-time low and this would allow Tartology Ltd to take advantage of the benefits of investing more into the business.
To assist in the expansion into New Zealand, Tartology Ltd is considering seeking additional funding. These funds will provide support for Tartology Ltd in purchasing the warehouse facility and extra machinery to increase the efficiency of producing and packaging the chocolate tarts in New Zealand.
7(a): Discuss the differences between banks and finance companies and describe two other sources of external funding that Tartology Ltd could use to assist it in its expansion. (8 marks)
Command term focus: Discuss + Describe
Discuss: develop relevant differences, advantages and limitations. Describe: give the main features of two other funding sources. Section 2 requires application.
See the full command term guide here: Command Terms.
7(a) Sample answer
Banks and finance companies are both financial institutions that can provide finance, but they differ in the type and range of services offered. Banks can accept deposits and provide broad financial services such as transaction accounts, business loans, overdrafts, foreign exchange and international payment services. A benefit of using a bank is that Tartology Ltd could access a larger and more structured loan to help purchase its New Zealand warehouse while also managing payments between Australia and New Zealand. However, a limitation is that banks may require strong financial records, security and regular repayments, which could place pressure on Tartology’s cash flow.
Finance companies are usually more specialised non-bank lenders. They may provide asset finance, invoice finance, trade finance or short-term business loans, but they generally do not provide the same full range of deposit accounts and everyday banking services as banks. A benefit of using a finance company is that Tartology Ltd could access more flexible or targeted finance for machinery, working capital or unpaid invoices. However, a limitation is that finance companies may charge higher fees or interest rates because the finance can be more specialised, quicker or higher risk.
One other source of external funding Tartology Ltd could use is share capital. Tartology Ltd could bring in new investors or issue shares to raise funds for the New Zealand warehouse and machinery. This would provide finance without regular interest repayments, although the original owners may lose some control and share future profits with investors.
A second source of external funding is a secured loan. Tartology Ltd could borrow money by offering an asset, such as property, equipment or other business assets, as security for the loan. This could help Tartology access a larger amount of finance for the New Zealand warehouse, but it creates risk because the lender may take the secured asset if Tartology cannot repay the loan.
2023 — Section 2 — Question 8(b) — 4 marks
Case study / context
Jay and Lin operate a men’s skincare business known as Woodyz. They started the business together in 2017 and are based in Fremantle, Western Australia. They have five retail stores around the Perth metropolitan area and set up a pop-up store weekly at the weekend markets around the state. The business sells skincare, such as shower gels, facial cleansers and creams. Woodyz prides itself on using 100% organic and vegan ingredients. Ingredients are sourced both locally and overseas. Primary ingredients include sandalwood oil, macadamia oil, aloe vera and cucumber.
Woodyz has a strong social media presence, with regular product information and tutorials posted on Instagram and TikTok. Customers have been also giving Woodyz rave reviews online and recommending the products on their own social media platforms. The business has a growing customer base and Jay and Lin have noticed in the past two years their website has received an increasing number of orders from South Africa. Their South African customers who live in Perth often visit Woodyz to purchase products to give to their relatives in South Africa when they go back to visit. Jay and Lin are now thinking of entering the South African market to grow their business further.
While selling at a recent ‘Men’s week’ convention in Perth, Jay and Lin met up with another stallholder, Alex, who runs Beards R Us. Alex sells shaving products and he also sources 100% organic ingredients. Alex has been considering venturing overseas and setting up production sites in South Africa as well. All three see the potential to grow their businesses together, both in Australia and overseas, over the next few years. Ethical practice is important to Jay, Lin and Alex and they are keen to ensure that any overseas production facilities adhere to international standards.
Jay, Lin and Alex would like to explore their options further. Both businesses would like to consider the options of either a joint venture or a merger to enter into the South African market. Jay, Lin and Alex are also considering options for funding. With interest rates on the rise, they are now seeking advice from a business consultant.
8(b): Describe two sources of external funding that Woodyz and Beards R Us could use to assist them in their expansion into the South African market. (4 marks)
Command term focus: Describe
Describe: give the main features of two funding sources and apply each one to the South African expansion.
See the full command term guide here: Command Terms.
8(b) Sample answer
One source of external funding is a secured loan. Woodyz and Beards R Us could borrow money from a financial institution and use an asset as security to help fund production sites, equipment or inventory for the South African market. This would provide funding for expansion, but the businesses would need to make repayments and may risk losing the secured asset.
A second source is trade credit. Suppliers may allow the businesses to purchase organic ingredients, packaging or shaving product materials now and pay later. This could help manage cash flow while they establish operations in South Africa, although late payment could damage supplier relationships.
2025 — Section 2 — Question 7(c) — External funding part only
Case study / context
SNO Tours is a Western Australian-based travel and tourism proprietary limited company. It has built a presence in the Australian market by providing unique small-group holiday experiences, focusing primarily on adventures with friends. Its target market is people aged between 18 to 25 who want to explore and are open to trying new things. The business model operates on the needs and wants of clients, including their budgets and preferred adventure activities. With a thriving client base and strong social media following, SNO Tours is considering expanding its tour offerings to include countries in Asia, specifically Japan.
SNO Tours feels Japan is a suitable starting point for small-group adventures as there are favourable economic conditions for both the business and its clients. With the Japanese yen (JPY) being weak compared with the Australian dollar (AUD), Australians visiting Japan can spend more on experiences while away. Compared to travel experiences in Australia, SNO Tours’ clients will be able to do more during their Japanese holiday, including affordable skiing holidays, visits to many cities and experiences of local culture. The relationship between the Australian and Japanese governments is positive and it is a safe and stable country for travel.
While the SNO Tours’ team is excited for this expansion, they are also aware that they will need more money to finance it. They have recorded a profit for the year, resulting in some retained profits, but will need to consider external sources of funding to make their dream a reality.
SNO Tours is well aware of the ethical implications of its industry. It has always held itself to high standards and all clients agree to a responsible travel agreement. It prides itself on its respect for local culture and will continue to do so. With expansion into international travel, it will be further considering its corporate social responsibility and how it can best operate in the travel and tourism industry.
7(c): Describe two external sources of funding SNO Tours could consider when expanding into a global market.
Command term focus: Describe
Describe: give the main features of two external funding sources and apply them to SNO Tours’ Japan expansion.
See the full command term guide here: Command Terms.
7(c) Sample answer
One external source of funding SNO Tours could use is finance from a financial institution. A bank or finance company could provide a business loan to help pay for Japan tour planning, marketing, booking systems, deposits and staff costs. This would provide more finance than retained profits, but SNO Tours would need to manage interest repayments and cash flow.
A second external source is government funding. SNO Tours could seek export or tourism-related government support to help promote its Japan tours and develop international markets. This could reduce the cost of expansion, although the business would need to meet eligibility requirements and funding may not cover all costs.