What are two primary sources of external capital for a business?

What are two primary sources of external capital for a business?

• A. Loans (debt) and equity investment (owners' equity)
• B. Grants and subsidies
• C. Retained earnings and depreciation
• D. Internal funds and venture capital

Answer: (A)

External capital comes from money that originates outside the business. The two primary forms are debt financing (loans) and equity financing (owners’ equity). A loan provides immediate funds in exchange for fixed repayment with interest, creating a debt obligation but keeping ownership intact. Equity funding brings in money from owners or investors in exchange for an ownership stake, so it doesn’t require repayment but does share future profits and ownership. Other external options like grants or subsidies can exist, but they aren’t as universally available or straightforward as loans and equity. Internal sources, such as retained earnings (profits kept in the business) and depreciation (a non-cash accounting expense), are not external funding. Venture capital is external, but the typical core pairing emphasized is debt and equity.

External capital comes from money that originates outside the business. The two primary forms are debt financing (loans) and equity financing (owners’ equity). A loan provides immediate funds in exchange for fixed repayment with interest, creating a debt obligation but keeping ownership intact. Equity funding brings in money from owners or investors in exchange for an ownership stake, so it doesn’t require repayment but does share future profits and ownership. Other external options like grants or subsidies can exist, but they aren’t as universally available or straightforward as loans and equity. Internal sources, such as retained earnings (profits kept in the business) and depreciation (a non-cash accounting expense), are not external funding. Venture capital is external, but the typical core pairing emphasized is debt and equity.