5 Major Sources Of Finance For Business

Preparing an adequately designed, well thought out finance model is one of the primary requirements for starting a business. The sources that one selects for procurement of monetary capital, must be appropriate and perfectly suited to the needs and the nature of the business.

5 Major Sources Of Finance For Business

Considering that a constant influx of finance is absolutely crucial for the consistent and uninterrupted functioning of the business cycle, it becomes obvious that choosing the sources of finance that will propel a business is a task that requires a lot of care, caution and consideration. Here’s a list of five of the simplest and the commonest sources that you can use to fund your business, alongwith their suitability :-

Identify Sources Of Finance For Business

Personal Investment 

Sole proprietors and Partners do not have the option of raising huge quantities of capital via the public. They have to fall back upon their own personal savings and monetary assets to fund their business. The advantage of using personal cash in the business is that one does not have to pay interest, nor does one become obligated to anybody. Furthermore, there are no limitations on the purposes for which cash can be used.

Also, personal investment creates a stronger desire to work, and reinforce one’s desire to earn profits because your own prior wealth is at stake. However, on removal of the rose tinted glasses, one would realize that personal investment in the business has its own natural limitations.

For the first, not everybody can afford to bring personal cash into the business. Secondly, upon failure, the person who contributes cash has to suffer unequivocally because it results in a reduction of personal assets,and there is no option to fall back upon. Hence, it is advisable to go for personal investment only if the person concerned is considerably well-off, and if the chances of absolute failure in the business are quite low.

Bank Borrowing 

Banks are no less than a boon for anyone who intends to get into entrepreneurship. With options for long term, medium term as well as short term funding – banks are easily the best and the most convenient option available to a business person for financial security.

5 Major Sources Of Finance For Business

While unsecured loans are provided by all banks for amounts that are not extremely huge, banks may often ask for a collateral security against which to give a loan to a person. Banks seek to ensure that in case a person is unable to repay a huge sum at the end of the fixed period, they would not be completely at loss and can recover some of the amount from the asset that has been collaterally secured.

Furthermore, another very sleek option that banks provide is overdraft facility. Which means, even after you exhaust your bank balance, you can still withdraw money from your account upto a certain pre-decided extent. Of course, you have to pay additional charges, called “overdraft charges”, for this service.

The advantage offered by bank borrowing is that it ensures convenience for those who cannot bring in personal cash. It also ensures transparency in financial operations because the bank keeps a regular vigilance upon such matters. The disadvantage is the some important asset may have to be forfeited in the case of inability to repay the loan. Also, interest charges add on to the financial obligations of the business. The most popular ways of bank credit taking are cash credit, bank loans, and discounting of bills.

Issuing Shares And Debentures

Most companies reply on this source to raise money. They offer shares and debentures for subscription by the public, in return for dividend payable on the profits or interest, respectively. The advantage of using public subscription is that a tremendous amount of capital can be raised, which would not be possible through other forms of finance sources.

The disadvantages are quite natural and eventual. Profits have to be shared with a large number of people, and because the shareholders become the owners of the company, there is naturally a level of boundation to them. Furthermore, debentures have to be paid back in full after a certain fixed period of time.

Business Angels

5 Major Sources Of Finance For Business

Business Angels are particularly interesting from the point of view of people who are just about to start with their business and are hopelessly wandering hither-thither to seek investors for their ideas. Business Angels invest in start-ups at a minimal rate of interest. They do not look for well-established players, they single out amateurs with fresh ideas brimming with potential.

They do not seek high returns, rather, they are intrigued by the extraordinariness of the business idea. As the name very well implies, Business Angels are perfect angels for any person who hopes to start-up. The trick is to identify the kind of people who are not hungry for money , and are rather interested in fostering ideas – and convincing them of the business potential of your idea.

Venture Capitalists

Venture Capitalists are quite similar to Angel Investors, except that for the most part, venture capitalists act only as finance managers or procurers, not people who themselves contribute to the finance. Venture capitalists reply on financial institutions, mutual funds, pension schemes, and other affluent individuals who are willing to take the risk.

Also, venture capitalists do not necessarily target start-ups. They do not look for ideas that are out-of-the-box, they are more practical in their approach and seek ideas that have business potential, and that will turn out to be at least fairly rewarding for them. Venture Capitalists have the advantage of accessibility over Business Angels, because there are a large number of venture capitalist companies floating that can easily provide you funds for a certain charge.

Business Angels, on the other hand, are hard to find and even harder to persuade. In other words, venture capitalists only arrange for funds, they act as mediators – whereas business angels provide the same to start-ups. Other popular sources of finance include – retained earnings ( corporations plough back their previous years’ profits), trade credit ( where businesses buy material from suppliers on credit), public deposits, lease capital, financial institutions, etc.

Thus, a large number of options are available for anyone who aspires for entrepreneurship. But one should not get blinded by huge numbers and advertisements and should study in depth every detail required, before proceeding to secure funds from any of the above mentioned ways. A single wrong step can cost you your business!