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Want To Start A Business? Here Are some sources of Funding in 2021!

Here Are some sources of Funding in 2021!

Finance has long been considered by Small and Medium Enterprises (SMEs) operators as an important issue. Obtaining financial resources assistance in the amount required and when they are needed can be more difficult for small scale entrepreneurial ventures than for established organizations. The critical issue is to ensure that sufficient cash is available for current operations and growth of the business. The owner must also ensure that money is available to settle current liabilities when due; these may include inventory, rent, telephone bills, office supplies etc. Other reasons for sourcing business finance include the following:

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i.upgrading facilities to comply with stricter environmental regulations

ii.financing production in cases where there is significant lag between when costs are incurred and when payments are received;

iii.purchasing of new equipment or facilities;

iv.purchasing of business vehicles; and

v.building up inventory in advance of a busy season.

Irrespective of the reason(s) for which funds are required, it is the sole responsibility of the business owner to ensure that funding is obtained at the right time, at the right cost and from the right source. Before raising the required funds, the business owner must estimate the actual funds needed in order to avoid encountering unnecessary high cost of capital or excess capital.

SOURCES OF FUNDS FOR NEW AND ENTREPRENEURIAL VENTURES

There are several sources of finance for both new and old entrepreneurial ventures. These include:

(i)Personal Savings

Personal savings is the most common source of financing for small business enterprises. It has to do with the personal money which the entrepreneur has been able to set aside for an intended business venture. This includes cash and any personal assets convertible into cash or to business use, for example, cash from family/friends which is an informal form of financing falls into this category. This may also be from past savings, trust accounts or some other form of personal equity of the business owner. This is the least expensive method of financing and also the easiest as the decision to lend is made by the same persons wishing to borrow the fund.

(ii)Borrowing from Friends and Relations

Funds can be raised for entrepreneurial ventures through borrowing from friends and relations. The amount to be raised through this source however, depends on the financial capabilities of the friends and relations and the relationship that exists between the business owner and his friends or relations. The repayment period and the interest payable are a function of the terms of borrowing which are usually determined by the lender.

Trade Credit

Trade credit as a source of fund occurs when a buyer makes an arrangement with the seller to buy goods on credit and pay later. However, this arrangement depends on the customer‟s good reputation and it often requires a pre-arrangement between the buyer and the seller. Trade credit is one of the most widely used short term sources of funds and the term normally falls within the range of thirty to ninety days which can still be extended after the expiration period, depending on the relationship between the parties involved.

(iv)Accrual Accounts

Accrual accounts can also be called account payable. It represents the continually occurring current liability of a particular business. These include wages, interest, taxes and other expenses that are payable in arrears. They are due but yet to be paid. Their repayment period is usually within a period of one year.

(v)Retained Earnings

Funds can also be obtained through undistributed profits. A business owner may decide to reinvest part of his or her profit back to business for efficient operations of the business. This is also called plough-back profit and it shows the naira value of ownership rights that result from the business retention of its past income. In business, retained earnings are usually considered as an additional fund for financing the future growth of the business. Retained earnings are helpful as a last resort in business finance. The inability of the business owners in meeting up with the stringent conditions of the financial institutions usually makes the business owner come to fall back to their business reserves for funds raising.

(vi)Equity Financing

Equity finance is a form of business finance in which funds borrowed to operate a business venture are not taken as loan but converted to equity (stake in ownership) which now makes the lender a part owner of the business venture, risk and profit are shared together. The amount of equity finance in a particular business may be substantial subject to factors such as the nature of the business, the total amount of capital required and the interest of the investor. The advantage of equity financing is that its infusion of capital does not have to be repaid like a loan.

(vii)Bank Loan

A small business entrepreneur can approach bank for a loan. This is a common practice among established small business enterprises with good reputation doing business with a particular bank. Banks usually charge their borrowers a prime rate and an additional charge usually called handling charge.The actual interest rate charged depends on the creditworthiness of the customers. Banks usually charge a higher interest rate to borrowers whom they perceive as having a higher risk of default. The bank interest rate also depends on the type of loan involved whether is fixed or variable. If the loan is fixed rate loan, the interest rate will be the same for the amount of money over the number of years involved. But if the loan is variable rate loan, the interest payable will vary periodically over the terms of the loan subject to the fluctuation of the market interest rates. Bank loan can be given either on short term or long term basis. Short term bank loan usually covers between one month and less than one year, while long term bank loan covers a period that is more than year one. Short term loans are used to replenish the working capital account, such as purchase of inventory, supply of consumables in an organization, finance of credit sales or taking of advantage of cash/bulk discounts etc. This is repaid after converting inventory or receivables into cash. The relationship of the borrower with the bank matters a lot. The reason for this is that banks are more likely to give loans to business owners they know very well and whom they have their business and personal records. The amount of money that banks are willing to give per time depends on the nature of business, the size of business, the repayment period and the creditworthiness of the business owner.

(viii) Project Financing

Project financing is the funding of a particular project by a financial institution. This can be asource of funds only when the proceeds from the project are sufficient to repay the capital sum usually known as the principal which is the amount of money borrowed for the execution of the project with interest accrued. The project will be used as the security for such loan and the advance is self–liquidating. In this case, the borrower„s financial standing or position is less important because the institution must ascertain the value of the project and ensure that the value is high enough to settle the amount of money borrowed by the contractor.

(ix)Venture Capital

Venture capital is the money invested by individuals or venture capital firms in small and high risk business enterprises. Venture capitalists are investors that invest in other people‟s businesses for the sole aim of profit. They receive equity participation i.e. the equity ownership right of some proportion in the business enterprises they have invested their money in. They participate substantially in the management of the enterprises in which they have invested, holding board positions and working in close liaison with the enterprise‟s management team.

The venture capital industry may consist of:
(a)wealthy individuals
(b)foreign investors
(c)private investment funds
(d)pension funds

 

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