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Sources of funding

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Introduction

Sources of funding Introduction "Money begets money. - John Ray" Setting up your own small business or becoming a contractor seems very appealing to many computer professionals. Though many businesses finance start-up or expansion from personal assets, sooner or later virtually all business owners need assistance from a financial institution. It is difficult to do business without ever using credit. [PISE] lists the various sources of funding available but the main focus of this report will be to discuss how these 'financial packages' appeal to us and the difficulties which company's or entrepreneurs face to obtain these funds. The report will try to conclude with a justification as to why one method is preferred to another and evaluate against the most commonly used source of funding today. Grants and Government initiatives Throughout the UK, there are hundreds of grants and support schemes available via many different organisations and institutions. However, the acceptance criteria of applications depend on many factors. [Government Paper] suggests that grants should "play an important role in boosting other - perhaps more relevant - areas of the innovation system". The factors may include the area of business start-up, certain business sectors or specific sectors of the population. Whilst considering the variety of grants available, I was surprised at the amount and range of grants available and the many acceptance criteria. ...read more.

Middle

Advantages Disadvantages No interest payments to make Investors usually looking for a high return, often in excess of 35% Possibility of new contacts and management help. Can cost a lot in professional fees to professional advisors to comply with the Financial Services Act 1986. May be able to lever more debt if required. Requires giving up a minority stake in the business. Focuses the business objective and provides business structure and discipline. May introduce short term thinking into the business Strengthens balance sheet and reduces gearing. High demands on information. Brings in capital investment and also experience, contacts and advice etc. Owners must be prepared to share control and rewards. Table 1 - Pros and cons of venture capital [Natwest Bank] With extensive experience, these investors bring considerable business knowledge to an enterprise; they are valuable resources in managing its expansion and have a long-term orientation when evaluating a firm's potential. However, despite this longer-term focus, these investors also have a definite exit strategy. They expect, at some point, to sell their share of the business. Banker's Loans Unlike the venture capital business, banks are lending their depositors money and therefore operate on a much lower risk tolerance. Because bankers have a very low tolerance for error, they conduct careful analysis of a business's financial strength and ability to service the debt from its operations and cash flow. ...read more.

Conclusion

A problem facing all small business lenders or investors is the difficulty in gathering data that is certified or easily verifiable. Because very little public information on small businesses is typically available, capital providers must collect proprietary data from the small business owner. As a result, strong relationships between entrepreneurs and their capital providers are critical to ensure access to and continuity in funding. [Financial Times] To conclude, grants and other incentive schemes are attractive by the fact that they are not repayable, however the process by which one can obtain a grant is an extremely lengthy and tedious process as well as having many criterion to meet. Venture capital/Equity Finance is also an extremely popular way to fund small businesses and entrepreneurs mainly due to the fact that large amounts of funds are available at no chargeable interest. These schemes have the added benefit of allowing their own experienced professionals to make management decisions of the business. This however, may not appeal to some people who would rather not share control of their business. Banker's loans are, by far, the most common sources of funding for small businesses. [Financial Times] states that last year, approximately 37% of funding for small businesses and entrepreneurs were obtained by banks and the remaining 63% covers other sources. The exhaustive, unappealing application process for which bankers loans were famous for, are now becoming a thing of the past. ...read more.

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