Where Mill Lane's money came from: The Mill Lane bakehouse cost $600,000. Saving up for it would have taken twenty years, so most of the money came from outside the company.
| Mill Lane in figures | Amount |
|---|---|
| Cost of the bakehouse | $600,000 |
| Profit the company keeps back in a year (retained profit, from 3.2.1) | About $30,000 |
| Lent by the bank | $400,000 |
| Still owed at the end of 2025 | $350,000 |
Money that comes from people and organisations outside the business is external finance (an external source of finance). Some of it is borrowed and must be paid back. Some is paid in for a share of the company. Some simply lets the business pay later, or use something without buying it.
There are eight external sources. The first two come from a bank.
| Loan capital | Overdraft | |
|---|---|---|
| What it is | A sum borrowed from a bank and repaid in instalments, with interest, over an agreed number of years | Permission from the bank to spend more than the current account holds, up to an agreed limit |
| Lena's example | $400,000 for the Mill Lane bakehouse; $350,000 still to repay at the end of 2025 | A $30,000 limit; $15,000 of it in use on 31 December 2025 |
| How long | Usually several years | Short: the bank can ask for it back at any time |
| Advantage | Lena and Marco keep all their shares: the bank earns interest, not a slice of the company | Flexible: interest is paid only on the amount used, for the days it is used |
| Disadvantage | Repayments and interest fall due every month, even in a bad month; in 2025 the company paid $10,000 in interest | The interest rate is high, and the bank can call it in at short notice |
Why does the bakery need an overdraft at all? The cafés and hotels that buy bread wholesale pay on credit. At the end of 2025 they owed the bakery $40,000. The bakers' wages do not wait for them.
So the bank lets the company's account go below zero, up to $30,000 (an overdraft). On 31 December it was $15,000 below zero. When the cafés pay, the balance climbs back above zero and the interest stops.
Features of loan capital
- A fixed timetable of repayments
- Interest charged on the amount borrowed
- No ownership given away: the owners keep every share
- Can be short or long term, and is often secured on an asset (collateral)
Features of an overdraft
- A set limit agreed with the bank
- Interest only on the amount used, usually at a high rate
- Can be called in by the bank at very short notice
- Flexible: the balance goes up and down
- Short term and usually unsecured
Say what makes it an overdraft: 'It must be paid back' and 'it puts the business in debt' are true of every kind of borrowing, so they do not describe an overdraft.
Say what is special about it: a limit, interest only on what is used, and a bank that can ask for it back at short notice.
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Lena and Marco want a fourth shop. Fitting it out would cost $120,000. There is another way to pay for it than a loan: sell part of the company.
The company already owes the bank $350,000, and a second loan would mean more monthly repayments out of the same takings.
Share capital: Lena's Bakery Ltd is owned through shares (1.2.3): Lena holds 600, Marco 400 and Marco's cousin 200. The money paid for shares is the company's share capital; on the 2025 balance sheet it is $200,000.
Raising more share capital
New shares
To raise more, the company creates new shares and sells them.
One payment
The buyer pays once and becomes a part-owner.
No repayment
The money is never repaid and carries no interest.
What the new owner gets
A share of the profit paid out (dividends), and a vote.
| Shareholder | Shares now | Share of the company | Shares after | Share after |
|---|---|---|---|---|
| Lena | 600 | 50.0% | 600 | 37.5% |
| Marco | 400 | 33.3% | 400 | 25.0% |
| Marco's cousin | 200 | 16.7% | 200 | 12.5% |
| New shareholder | 0 | 0% | 400 | 25.0% |
| Total | 1,200 | 100% | 1,600 | 100% |
Nobody loses a single share, yet everyone owns less. Selling new shares shrinks each existing owner's slice (dilution). Lena falls from half the company to 37.5%. With Marco she still holds 62.5%, so together they still control the votes.
Who buys the new shares?: Lena's Bakery Ltd is a privately held company, so its shares go only to people the shareholders accept (1.2.3). Farida Rahman built a chain of twelve cafés and sold it. She offers $120,000 for the 400 new shares, and a seat at the directors' meetings.
Business angel: Farida now invests her own money in small food businesses she believes in. She is a business angel: a wealthy individual who invests her own money in a small or new business in return for a share of it, and usually brings advice and contacts as well.
What Farida's money brings (advantages)
- No repayments, no interest. The $120,000 never has to be paid back, so the fourth shop is not another monthly bill.
- Experience. Farida has opened twelve cafés; her advice on sites, prices and staff comes with the money.
- Contacts. Landlords, suppliers and banks she already knows.
What it costs (disadvantages)
- Ownership diluted. Lena falls from 50% to 37.5%, and a quarter of every future dividend goes to Farida.
- A new voice in decisions. Farida votes, and an investor who disagrees with the founders can slow or block their plans.
- Hard to find. An angel with the money and the same values can take months to find.
Share capital and business angels: Share capital is the source: money raised by selling shares. A business angel is one kind of buyer: a wealthy individual using her own money, often with advice.
Public and private companies: A publicly held company such as Goldcrust plc can sell shares to anyone on the stock exchange and raise far more. A privately held company like Lena's sells only to people its shareholders accept.
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750 backers and a baking school: Lena wants to turn the empty room above the Mill Lane bakehouse into a baking school for children. Instead of asking one bank, she asks the public.
The baking school plan
- The cost: ovens, benches and sinks would cost $30,000.
- The ask: the bakery posts a video on a crowdfunding website.
- The rewards: give $25 and get a loaf a week for a month; give $100 and your child gets a place on the first course.
- The result: in six weeks 750 people pledge an average of $40 each: $30,000.
Raising money online from a large number of people, each giving a small amount, is crowdfunding. In Lena's campaign the backers get rewards, not shares. So nothing is repaid, no interest is charged and nobody new owns part of the bakery.
Some campaigns offer small shares instead of rewards. Then the backers do become part-owners.
How the campaign works
Set a target and a deadline
$30,000 in six weeks. On many websites, if the target is missed, the backers get their money back and the business gets nothing.
Offer rewards
A loaf a week, a class place, a name on the wall. Each reward costs something to deliver, so it is part of the cost of the money.
Spread the word
The video, the shop windows, the regulars. By opening day 750 people have heard of the school, which is advertising the bakery did not pay for.
Collect the money
The website keeps a fee and passes the rest to the bakery. The idea is now public, so a rival can copy it.
The second source in this section does not fit Lena's company at all. A bakery with three shops and a bank loan can borrow from a bank. It fits the person a bank will not see.
Zainab cooks as a volunteer in the Second Helpings kitchen and wants to sell flatbreads from a market stall. She has no savings, no business record and nothing a bank could take if she failed to repay. A microfinance provider lends her $800 for a stall, a gas ring and her first flour. She repays it in small weekly amounts over six months, and opens a savings account with the same lender.
| Crowdfunding | Microfinance | |
|---|---|---|
| What it is | Money raised online from many people, each giving a small amount | Small loans, often with savings accounts and training, for people on low incomes whom banks turn away |
| Example | 750 backers give $30,000 for the Mill Lane baking school | Zainab borrows $800 for a market stall, repaid weekly over six months |
| Advantage | No interest, no repayments and no loss of ownership; it also spreads the word | Finance for someone with no track record and nothing to offer as security (collateral) |
| Disadvantage | The target may be missed, the rewards and the fee cost money, and rivals see the idea | The sums are small, enough for a stall but not a shop, and repayments start almost at once |
Features of microfinance
- The loans are small and usually short.
- The borrowers are usually on low incomes, often in developing countries, and most are women.
- Usually no collateral is asked for.
- Many providers are social enterprises, and many also offer savings accounts and insurance.
Interest is not a feature: Interest rates vary from one provider to another, so 'high interest' or 'low interest' is not a feature of microfinance.
Every Monday a lorry from Valley Grain, the farmers' cooperative, delivers the week's flour to Mill Lane. The invoice comes with it, but the bakery has 30 days to pay.
By the time the bill is due, that flour has been baked, sold and paid for.
Trade credit: When a supplier lets a business take goods now and pay later, usually in 30 to 90 days, the business is using trade credit. Until the bill is due, the supplier's money is paying for the flour.
Lena's trade credit: At the end of 2025 Lena's Bakery Ltd owed its suppliers $45,000 (creditors on the balance sheet), most of it to Valley Grain: a little more than one month of ingredients.
| Trade credit | Leasing | |
|---|---|---|
| What it is | Buying goods now and paying the supplier later, usually in 30 to 90 days | Paying a regular fee to use an asset that another firm owns, instead of buying it |
| Example | Valley Grain's flour, paid for 30 days after delivery; $45,000 owed at the end of 2025 | A refrigerated van: $900 a month for four years instead of $40,000 to buy |
| Advantage | No interest if paid on time, and the flour is sold before it is paid for, which eases cash flow | No large sum up front, repairs are often included, and the van can be swapped for a newer one when the lease ends |
| Disadvantage | Pay late and the supplier may stop the credit, ask for cash on delivery or stop supplying; a discount for paying early is given up | Over four years it costs $43,200, more than the $40,000 price, and the bakery never owns the van |
The cakes and lunches must stay cold on the 5 a.m. run to the shops. A refrigerated van costs $40,000. Instead, the company can rent one from a leasing firm for $900 a month for four years (leasing). The leasing firm owns the van (the lessor); the bakery uses it and pays (the lessee).
$900 × 48 months = $43,200. The bakery pays $3,200 more than the price and hands the van back at the end. In return, the $40,000 stays in the bank today.
Leasing never makes you the owner: However many payments the bakery makes, the van belongs to the leasing firm and cannot be sold to raise money.
Sale and leaseback: A business that already owns an asset can turn this round: sell the asset to a finance company and lease it back (sale and leaseback). It gets the cash now and keeps using the asset, but pays a fee for it from then on.
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