Rather than buying an asset such as premises, some businesses will lease the property. As this is cheaper than buying, it provides saving and therefore access to more funds. This involves two costs
- The cost of the lease, which is the right to use the premises for a certain period of time, usually a number of years
- The monthly or yearly rental on the lease
Although the business does not own the asset, it is a cheaper and more flexible way of starting a business. If the business does not succeed, the lease can be sold to someone else.
Businesses, like individuals, buy goods on hire purchase. This allows immediate access to asset without having to pay the full price. With the hire purchase system the business hires the asset until the final payment is made and then the asset is owned. Although this is an expensive way of buying something, it has the advantage of giving immediate access to the asset
A fixed term loan has to be repaid with interest within an agreed period. It is a cheap way of borrowing money and allows the business to plan the repayment. In some cases the loan is secured against a business’s asset, which gives the lender the first claim to the asset if the business defaults on repayments.
An overdraft allows a lender to borrow up to an agreed amount of money if needed. This overdraft facility is used when necessary and repaid as soon as possible. This credit facility is often expensive but it does allow a temporary use of additional funds when necessary.
Factoring occurs when a business has difficulty collecting the money it is owed from debtors. These debts are then sold to a factoring agent for about 80 per cent of their value. The factoring agency then collects all the debts. The remaining balance, less the charges, is paid to the business after an agreed period of time. this original business therefore collects most of the money it is owed
These funds are the most attractive as they do not have to be repaid. Central government, charities, local government and other organisations will give grants of the business meets certain aims or is located in parts of the country that are eligible for start up grants.
Whenever a business makes many small purchases it is easier to have an account with the supplier than for different employees to write cheques for each transaction. This is certainly the case when there are large number of individuals buying supplies from the same source. Privately owned garages, plumbers merchants etc often run such accounts for local businesses. These accounts do not need to be settled until the end of the month, or later, and this allows the purchaser to use the months credit as a source of income besides providing the possibility of a discount because of the volume of trade
A business can use a fixed asset, such as premises, as security in raising money from banks, building societies or other lenders. This loan is repaid over a number of years. If the borrower is unable to repay the loan or the interest, the lender has the first claim on selling the security to collect the money that it is owed
Some organisations use a business credit card for spending. This is particularly the case with business expenses such as petrol, entertainment, travel, etc. occasionally a business credit card can be used to purchase raw materials or supplies, rather than using a customer account. Credit card companies ask for the account to be settled at the end of each month.
Internal Finance
In addition to the above external sources of finance, there are some internal sources of finance. These allow businesses to use their own financial resourced rather than having to rely on others.
- Improved Financial Controls
One of the most important means of raising finance is through improved financial control. It entails considering whether money is currently being wasted. Sometimes this is an easy task and wastage is obvious. At other times this involves making staff redundant, reducing unnecessary expenditure or collecting debts more quickly
A business profits are used to repay the original investors or for investment. In each year businesses aim to use some of their profits for future expansion of the business
Although this is often a drastic solution to a lack of cash, it is possible to sell some of the business’s assets. This is sensible if the business is upgrading equipment and changing its production, but it has to be considered carefully because once the assets are sold it will be more expensive to replace them.
Which Source of Finance should be used
Once all the potential sources of finance are identified, the business has to select which ones are the most appropriate for the business. There are instant answers as different businesses need different solutions. In deciding how finance the business, consideration of both initial requirements and the on going needs should be given. To help decide the following should be considered
- Is it short term or long term finance that is needed
- How much does each source of finance cost
- Is collateral or security needed for some sources of finance
- Will you have to give up part ownership of the business to raise the finance
- Can the business afford to take risks with the finance
The answers to these questions will direct the owners of the business towards the right solutions for them. Money for starting a business is not the only reason for raising funds, most people need financial help to keep themselves going until the business generates income.
Entrepreneurs are therefore often trying to raise money for
- Capital, which is the one off expense of starting the business
- Working capital to continue trading until the business earns enough income
The financing of the business can be split into tow separate stages
- Funds to start the business
- Additional funds once the business is trading
At both stages finance can be raised from sources out side the business or from the business and it owners internal sources. All businesses have to make use of both internal and external sources of finance, so it is mainly a question of getting the right balance. Although there is a wide range of sources of income available to new businesses, each one has its advantages and its costs
