Pecking order

This refers to the priority order in which businesses use different sources of finance.

Sources of finance have different costs associated with them. Internally raised funds have lowest costs, then external borrowing, then issuing new equity. This creates the pecking order for businesses to work down, taking more costly options when other sources of finance are not available.

Within external borrowing there may also be a sub pecking order, for example existing bank credit, secured loans, unsecured loans – depending on the risk and costs of borrowing. Pecking order is a term normally found in financial management; explore our learning zone to discover more.

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