Tuesday, May 13, 2014

Capital sources for small businesses

When starting a new business or nursing back to health an older business back to its peak days, the importance of funding is paramount. Also, how and where the funds come from also make it crucial for the future decision making process in the business. Depending upon the options at hand there are several options small business could look at for their financial needs:


1)      Owner’s personal savings


This is perhaps the most common and basic source of funds for a newly created small business unit. The owner, who happens to invest his /her personal savings into the business, guaranteed complete ownership and control over all aspects of the organization. However, this would mean when the business incurs any loss, it eats into the personal funds of the owner but could be highly beneficial, when the business rings in successful returns.

2)      Consumer and business loans


This form of funding can be classified under ‘debt-funding’, whereby a bank could provide the financial assistance required for the business. Under business loans, the banks would ideally ask for collateral as security against the loan with the aim to gauge, whether the owners/shareholders find it worthwhile taking the risk that they are asking the bank to take. The disadvantage however, comes in when there are tough financial conditions prevailing, and the bank asks for repayment of the whole loan immediately. On the other hand, consumer loans need a verification of personal assets of the owners of the business, before the demanded finance is granted. Banks usually look at a good credit history/score before granting such loans, and also offer the advantage of not asking for a repayment of total loan amount if the financial weather is going through rough times.

3)      Asset leasing

If the business hasn’t got the liquidity or fund source to buy an asset that it needs to run the business, there is always an option to lease the same from a source. However, the owner has to ensure that in the medium and long term, the cost of the bearing the lease should not exceed the cost of EMIs (equated monthly installments), for ownership of the asset.

4)      Customer lending

If a business is on good terms with its customers, there are chances that these customers would be ready to pay an extra loan, or advance payment for the letting in the extra financing needed. In other words, if the customers believe in the business delivering for them when needed, they could lend some extra financing through advancement payments, the benefits of which they could reap later with any additional products/services, or trade discounts.

Note:
* The author doesn't claim to be an expert on financing, hence professional advice always should be sought before deciding.
* Image source: Google Images. No copyright law infringement meant hereof. 

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