Many entrepreneurs have the skills and ideas to start their businesses but the most common problem which they face is the lack of capital to finance their business. A number of ways are available through which entrepreneurs can obtain cash to start their business. As each option has its advantages and disadvantages, it becomes tough for an entrepreneur to select one. The following are the possible sources of
business and finance:rn1. Bank Loan: rnA bank loan is the amount of money which banks are willing to lend to the person who has applied for the loan. Bank loans are usually short term, extending over a period of six to seven years. Bank loans carry a lot of requirements such as the business plan, personal income statement, tax returns and loan repaying history. Obtaining a bank loan is a time-consuming process, as it takes time for the loan application to processed. It is also expensive because of the large interest payments that are to be made by the borrower. rn2. Self-Funding: rnMany entrepreneurs fund their business themselves. For this, they may use the retained profit which is the leftover profit after shareholders have taken their share of profits. Retained profit does not have to be repaid unlike, a loan. However, many small firms could find that their profits are too low to finance the expansion needed. Alternatively, entrepreneurs may sell their existing assets, which are no longer required by the business, to get the necessary cash. This makes better use of the capital tied up in the business. However, this source of finance is not available for new businesses as they have no surplus assets to sell.rn3. New Partner: rnAdmitting a new partner in the business is also a source of finance. The new partner may or may not become an employee of the business. Strategic partners can benefit the business by aligning resources. They also help the business in developing an edge in the marketplace. For example, a digital camera company and a computer manufacturer can team up to buy advanced equipment which can result in the high-definition printing of pictures.rn4. Factoring of Debts: rnDebt factoring is specialists’ agencies that ‘buy’ the debts of firms for immediate cash. They may offer 90 percent of an existing debt. The debtor will then pay the factor along with the additional 10 percent. This 10 percent represents the factor’s profit. Immediate cash is available to the firm which has sold its debts. This is cheaper than the loan as no interest payments have to be made. However, the firm does not receive 100 percent of the value of its debts as the remaining 10 percent is the factor’s profit. rn5. Venture Capital: rnVenture capitalists are professional investor groups who invest in relatively new businesses. These groups generally seek a high return on their investments. They are willing to invest in your business if they are impressed with your business idea. In return of their investment they want a major role in controlling your business. They may also ask for a huge share in the profits. Entrepreneurs can visit websites, such as Gust.com, to seek information about venture capital associations.rn6. Crowd-Funding: rnCrowd-Funding pools small sums of money from many people, usually through an internet campaign. It provides a financial lifeline to those entrepreneurs who lack strong financial statements necessary for successful bank loan applications. Innovative businesses can use social media sites such as Kickstarter and Indiegogo to appeal for financial support through crowd-funding. Businesses have to offer perks to those individuals who are willing to pitch in some money. However, crowd-funding platforms such as Kickstarter and Indiegogo collect a percentage of funds received as their hosting fee. If the business idea is not liked by the people, then you may find it difficult to raise money.rn7. Microloans: rnMicroloans are one of the examples of small business administration loans ranging from $500 to $100,000. If you are not able to obtain a bank loan due to your low credit worthiness, then you should not worry. There are many private companies and nonprofit organizations that are willing to offer small loans to promote businesses. These loans offer generous repayment terms ranging from one to five years. However, the annual interest percentage in some places is 36%, which is expensive for small business owners.rn8. The Issue of Shares: rnThis source of finance is only possible for Public and Private limited companies. Shares are often referred to as equities. The sale of share is called equity finance. Private limited companies can raise more capital by selling shares privately to family, friends or business contacts. Public limited companies have the ability to sell a large number of shares to the general public. A right issue of new shares is a very common way for public limited companies to raise additional capital. This gives existing shareholders the right to buy new shares in proportion to their current holding. This avoids the problem of new shareholders changing the balance of ownership. A share issue provides permanent capital which does not have to be repaid. In addition, there are no interest payments as well. rn9. Selling Debentures: rnDebentures are the most common form of long-term loans that can be taken out by a corporation. These loans are normally repayable on a fixed date and pay a fixed rate of interest. A company normally makes these interest payments before paying the dividend to its shareholders. In contrast with other types of debt instruments, debentures are beneficial as they carry a lower interest rate. They also have a repayment date that is far in the future. rn10. Credit Cards: rnBusiness credit cards are one of the most readily available ways to obtain finance. With little cash on hand, owners can use credit for everything from buying equipment and raw materials to daily operating costs. A higher interest percentage is charged if payment is not made on time, thus business owners should use credit cards sensibly and effectively.