It’s all very well to have dreams of grandeur, to have a vision of empire and developing your own business giant. However, the bigger the dream, the bigger the financial need. No business can grow without money. The availability of sufficient funds and capital is one of the critical factors that determines the growth and success of every business. Whatever stage your business is at, without financing growth is limited. But where can the financing come from? This is something that stalls a lot of entrepreneurs, who run out of ideas fast when it comes to potential sources. However, there are often many sources that remain untouched and this article seeks to provide a little light onto the various sources available.
Financial sources can be separated into two relatively broad categories: internal sources and external sources. There are also short term and long term sources that apply to the latter, which we will also look at in due course.
Internal Sources of Finance
No business will have internal sources of income unless it is running and generating a sales and purchasing stream. These sources are therefore exclusive to businesses that are already established.
Retained Profit is the after tax profit that has not been returned to the owners. Approximately 65% of business funding comes from the retained profit, as it is the cheapest source, carrying the
advantage of requiring no repayments or interest charges. It is a clean and generous source of income.
Release of Surplus or Unrequired Assets
This is essentially where items owned by the business previously of use, become redundant or surplus to requirements. This could be an old computer, a car, or even a building. Selling these unused or surplus items can be a great way to raise funding, and make better use of capital that is otherwise tied up doing nothing.
External Sources of Finance
All other sources of income are generally external sources, of which there are a much greater variety of options. Both developing and established businesses make use of external sources over long and short periods of time.
Short Term Options:
One short term option is to sell on a company’s debt to a specialist agencies in exchange for immediate cash. The risk of collecting the debt in this method will be retained by the factor. This does carry certain amount of risk and potential high rates of interest.
Short Term Loans:
Some people even try to finance their start-up or side business using short term loan or payday loans as they provide very quick stream of cash. These also come in handy where cash flow is running just a few days behind for the month. While short term loans like this can carry high levels of interest, they offer an immediate solution.
Many people enjoy the facility of having an overdraft with their bank account. For businesses this is much the same. A bank may offer an overdraft to a business permitting them to withdraw over the real value of the funds that are actually available to him. The overdraft amount is at the discretion of the bank, but will vary depending on credit rating, and is also subject to a rate of interest charged on a daily basis.
Long Term Options:
If you are great at selling a pitch, or if you have a colleague that is, then these are great sources of investment. Venture Capitalists are individuals or businesses that are prepared to discuss investing in growing businesses, hoping for some return in the future. This can often result in parting with a stake in the company but can offer a door to financial support to carry growth forward.
This will only concern companies that are limited, and involves the issuance of various different types of shares in the stock market. It is a great way to source funding but again carries a certain amount of risk.
Long term Loans:
These carry less interest than short term loans, but last a lot longer which can lead to repaying more over time than you would with a short term loan. Lending banks and institutions offer loans and facilities to businesses that have a reasonable credit history and respectable financial status. This source is widely used by businesses in their start up stage, and is usually one of the first sources of financing that are considered by companies especially facing their first period of growth.
Whatever the form of financing you choose, each carries its own level of risk. It is important to be knowledgeable of exactly what you are committing to, ensuring you stick to any credit agreements and repay the amount borrowed on time or your business and credit rating will be at risk.