Source of Business Finance
Sources of Business finance
IntroductionFor business to commence and thrive, finance is an essential capital to facilitate firm’s operations. Morris (2011) explains that starting a new business or enhancing growth is dependent on the available avenues from which entrepreneurs can source the financial base. He again adds that firms have a variety of areas to solicit funds so as to develop products or facilitate expansion. However, McLaney (2006) contradicts that starting a business face a lot of difficulties in the quest of financing start-up operations; for instance, new ventures are not fully guaranteed to obtain bank loans because bankers have less interest for businesses at infancy stages. Also, Sherman (2005) adds that starting businesses undergo tedious task of convincing the loaners, even when the best business plan is remitted as collateral. Conversely, McLaney (2006) reaffirms that already built firms have the upper hand for sourcing more funds so as to necessitate their growth.Charantimath (2006) reports that funds for entrepreneurial and development of business are either sourced from internal or external avenues. Again, the liturature explains that there are varied internal sources, of which the principal ones include owner’s investments, retained profits, debt collection, sales of stock, and fixed assets. On the other, external funds come from bank loans, overdrafts, partnership, hire purchase, leasing, trade credit, and government grants just to mention but a few (Vinturella & Erickson, 2004). However, Dlabay and Burrow (2007) herald the concept of 3Fs that means that businesses get their funds from friends, family, and fools before exploring external sources. Notably, small enterprises suffer from obstacles of more considerable variance of profitability, growth, and survival, which leads to special problems as they seek for finances, opposite of what larger firms enjoy (McLaney, 2006).Rationale of the research is particularly to understand how starting or expanding businesses strive to source their financial resources. Again, as Acs and Karlsson (2002) postulate, the study is critical in conducting a SWOT analysis to weigh the strengths and weaknesses of using a particular avenue to source funds. Explicitly, the study is meant to show the hurdles and opportunities that enterprises are subjected to or enjoy, respectively in their process of initiation or growth of their production and assets. Furthermore, a study by Kirkwood (2003) supports this paper by admitting that understanding business funding forms the ground guideline from which investments are made and realized. Timmons, Spinelli, and Zacharakis (2005) also comment that the study of business finance envisages the factors that affect the choice of financial source.Methodologically, studying business funding depends on secondary data collected from the sampled firms. Gustafson (2004) notes that a researcher just need to access the database kept by the selected business to check out on where and how the firms solicit for funds. Charantimath (2006) also adds that if the business or industrial journals that are well kept and updated are analyzed with the guide of the stakeholders, it elicits how and where the funds are drawn. However, Vinturella and Erickson (2004) who reiterates on small and medium scale enterprises (SME), argue that most upcoming the SME are started by funds from personal savings, family, relatives, and friend. Therefore, such study calls for formal interviews so as to receive primary information from the owner(s) of the firm. In addition, academic papers listed in the bibliography of this paper are paramount in the research because of the relationships that outline works with complementing ideas, and those that contrast. For example, Charantimath (2006) categorizes fund sources as internal and external while Dlabay and Burrow (2007) talks of 3Fs and external sources.Internal and External Business FinancingCharantimath (2006) opines that internal sources of funds entail personal savings as startup capital so as to set up a business. He also adds that additional capital for expansions may be from individual investments. Since such moneys are not repaid, and no interest involved, they are considered as long-term financial sources. Unfortunately, there are limits to investments depending on a person’s capability. Timmons Spinelli and Zacharakis (2005) reports that after duration of more than a year, retained profits can be ploughed back as medium and long-term internally sourced funds. Similarly, profits are not repaid and interest not required; nevertheless, new businesses do not earn profits, or sometimes loss might accrue. Some short-term internal funds may also be solicited by selling off the unsold stock and collection from debtors. Alternatively, surplus assets may also raise medium finance. In emphasis, as Dlabay and Burrow (2007) observe, friend, relatives, and family also play a crucial part in financing businesses, especially for SMEs.Acs and Karlsson (2002) best explains the external sources of business finances by enlisting them as bank loans and overdrafts, leasing, hire purchase, trade credit, partnership, mortgage, share issue, and government grant. Medium or long-term bank loans are borrowed to be paid after an agreed period with interest. The loans may be expensive when the set interests are high or may be the access could be deterred by security or collateral requirements of the loaner while short term overdrafts are cheaper alternatives. Again as McLaney (2006) compliments, partnerships necessitate sharing of costs and financial contributions or a limited company may issue more shares to gain long-term funds. Lump sum payments can be avoided through leasing of assets, mortgage, trade credits, and hire purchase so as to give the firm some ample time in organizing or consolidating funds for repayments or settling installments. Gustafson (2004) further highlights that, both new and established firms may apply for grants from the government without repayments.Factors Behind the Choice of Finance SourceAtkinson, World Institute for Development Economics Research and Oxford University Press describes the factors that firms consider before choosing a particular financial source. Purpose asks the question, what will the fund be used for? Additionally, time questions the period for which the finance is required. Size, ownership, and the amount of money needed, also influence where and how to source the funds.ConclusionSmall and large scale businesses enjoy a variety of avenues to source short, medium, or long-term finances internally or externally; however, the former faces much hurdles during the commencing and even growth phases. The variation in sources and access of finance creating the problem stamen of this study since the paper explores the factors that determine the variance. Again, this study rationally investigates the factors that pre-condition the choice of a given financial source. For the audience to see the relational study, different academic literatures have been used to exhibit comparison and contrast as aforementioned.
Acs, Z. J., & Karlsson, C. (2002). Institutions, Enterpreneurship and Firm Growth. Dordrecht: Kluwer Academic Publishers.
Atkinson, A. B., World Institute for Development Economics Research., & Oxford University Press. (2005). New Sources of Development Finance. Oxford: Oxford University Press.
Charantimath, P. M. (2006). Entrepreneurship Development and Small Business Enterprises. New Delhi: Pearson Education.
Dlabay, L. R., & Burrow, J. (2007). Business Finance. Mason, Ohio: South Western.
Gustafson, C. R. (2004). Rural Small Business Finance: Evidence from the 1998 Survey of Small Business Finances. Agricultural Finance Review, 64(1), 33-43.
Kirkwood, H. P. (2003). Finance and Investments. Journal of Business & Finance Librarianship, 8(3-4), 153-166.
McLaney, E. (2006). Business Finance: Theory and Practice. Harlow: Prentice Hall, Financial Times.
Morris, M. J. (2011). Starting a Successful Business (7th ed.). London: Kogan Page.
Sherman, A. J. (2005). Raising Capital: Get the Money you Need to Grow your Business. New York: AMACOM.
Timmons, J. A., Spinelli, S., & Zacharakis, A. (2005). How to Raise Capital: Techniques and Strategies for Financing and Valuing your Small Business. New York: McGraw-Hill
Vinturella, J. B., & Erickson, S. M. (2004). Raising Entrepreneurial Capital. Oxford: Elsevier.