Sources of Finance for a Business Essay
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Sources of Finance for a Business
For a business to successfully run, it must have sources of finance. These are methods of financing the running of the business, buying of stock and paying of workers. Small businesses and large businesses have different sources of finance. In this section, I will discuss the different sources of finance used by small and large businesses, and the advantages and disadvantages of each, starting with small businesses.
Setting up a business costs money. For instance, setting up a bakery involves buying or renting a shop and buying stocks of flour and so on. One source of finance for a new business is equity or equity capital. This is money which is put into the…show more content…
Using retained profit has one advantage over borrowing money because the business doesn’t have to make payments on the money that is retained. It does not have to be repaid, so no interest or dividends are due on it. However, a problem with retained profit is that it has to be accumulated, which takes a long time. A business must be successful to have a profit, especially to make enough where they can afford to retain some.
Many new businesses borrow money in order to start. As they continue trading, they may need to borrow more money to survive or expand. Banks are the main source of loans for small businesses. With a bank loan, the business usually borrows a fixed amount of money. It will then pay this back in regular fixed instalments. These repayments include the interest on the outstanding money owed. The bank may ask for security or collateral on the loan, which means that the business must pledge assets to the bank. The bank can sell these assets if the business cannot repay the loan. The most common type of security is property, for example a factory. For a sole trader, there is no distinction between the assets of the business and the personal assets of the owner because of unlimited liability. Therefore, owners might offer their own houses as security. Bank loans secured on property are called mortgages. Mortgages are the main source of expansion for small businesses, as they
There are a number of sources of financing available to businesses facing a short-term cash crunch or requiring an infusion of cash to finance an unforeseen development. The most obvious such source of funds would be the banking system. Banks make money by charging interest on loans to businesses and to individuals. Assuming the business in question has an otherwise solid financial foundation, a short- or long-term loan would be a routine measure from both its and the bank's perspective.
Another source of funds would be what is called an overdraft agreement, which is the bank's authorization to the business to essentially write checks in excess of the amount of money the business has in the bank. Basically, it is the bank's consent to bounce checks with the assurance that the bank will honor the draft. Other sources of funds include whatever savings the business has accumulated for recapitalization of a production line, for issuance of dividends to stockholders in the case of publicly held corporations, or for whatever other reason a corporate savings account may be maintained. Funds can be attained through arrangements with customers to pay in advance for yet-to-be delivered products or through the issuance of a form of bond. Cash can also be found through loans from its owner to itself (in other words, the owner of the business dips into his or her private savings to transfer money to the business).