External sources of finance

External: This is the money raised from outside the business. It includes

Short Term

Bank overdraft: Bank overdraft is a facility given by banks to its business customers, people having current accounts. Through this facility the customers can overdraw their accounts to a greater value than the balance in the account. To overdrawn amount is agreed in advance with the bank manager. The bank assigns a limit to overdraw from the account and the business can meet its short term liabilities by writing cheques to the extent of limit allowed.



  • No need for collaterals or security.
  • More flexible and the overdraft amount can be adjusted every month according to needs.
  • Interest rates are usually variable and higher than bank loans
  • Cash flow problems can arise if the bank asks for the overdraft to be repaid at a short notice.

Trade Credit: Usually in business dealing supplier give a grace period to their customers to pay for the purchases. This can range from 1 week to 90 days depending upon the type of business and industry.



No interest has to be paid.

The business may not get cash discounts.

By delaying the payment of bills for goods or services received, a business is, in effect, obtaining finance which can be used for more important expenditures.

Factoring of debts: It involves the business selling its bills receivable to a debt factoring company at a discounted price. In this way the business get access to instant cash.

Click on these links to know more about debt factoring

Factoring of debts
Advantages and Disadvantages of debt factoring


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