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Sources of business finance

Sources of business finance

 

In starting a business, the major problem that arises is the sources of business finance requires is setting up the business, though an entrepreneur might have a great idea of how to manage and turn it ideology into a successful business. But one thing is raising the capital in starting up a business.

Business finance is a branch of economics concerned with resource allocation as well as resource management, acquisition and investment. Simply put, finance deals with matters related to money and the markets, it involves raising of money through the issuance and sale of debt and/or equity.

It is often referred to as one of the hardest part of starting a business because in raising finance for starting-up, The entrepreneur have to first of all answer these questions of:

Moreover, one also have to take a look at the following aspects of start-up:

 

Read the Advantages and Disadvantages of the sources of business finance

 

Sources of business finance for a start-up is to divide them into:

 

Internal sources

 

The internal sources of a business include:

 

 

 

External sources

 

Read the Advantages and Disadvantages of the sources of business finance

 

Loan capital could also be in form of a bank loan and a bank overdraft.

A bank loan

This provides a long-term finance for a start-up, the bank would state the fixed period over which the loan provided is to be repaid (like say, 5 years or more), the rate of interest and the timing and amount of repayments.

The banks seek for loan security in form of personal guarantees provided by the entrepreneur (it could be a collateral or guarantor). Bank loans are good for financing investment in fixed assets and are generally at a lower rate.

A bank overdraft

This is a more short-term finance which is also widely used by start-ups and small businesses. An overdraft is a loan facility that enable banks to allow the business “owe it money” when the bank balance goes below zero, in return for charging a high rate of interest. It helps the business meet its short-term cash flow or working-capital.

 

The amount of share capital or equity financing a company has can change over time. A company that wishes to raise more equity can obtain authorization to issue and sell additional shares, thereby increasing its share capital.

Thus, debenture is like a certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified amount with interest and although the money raised by the debentures becomes a part of the company’s capital structure.

It is quiet different from share capital as debenture holders have  a preference over shareholder in terms of dividend payment.

Read the Advantages and Disadvantages of the sources of business finance