Small Business Financing








Small business financing is not all about getting loan, credit card, and issuing of shares. It needs careful planning.

In rising the needed capital for your business you need to go back to the drawing board and you should be able to ask yourself:

How much money do I need? What particular project do I need this money for? What are the sources of getting the needed fund? What if I don’t have security for the finance am I willing to dilute the business ownership in order to get the needed capital?

Needs for Small Business Financing

The need for small business financing can not be under extimated. Bellow are some of the reason why small business financing is neccessary.

• Small business finance is neccessary for small business start up. It can be used to buy new equipment, pay for premises, and advertising the goods/services.

• It might be enough to pay staff wages and suppliers. This shows that it can be used to run the business.

• It can be used to expand the business just by having money to pay for a new branch in a different city or country in order for the business to grow and expand

Advantages of Small business financing

• Small business financing when taken wisely can make you retain ownership and control over your business.

• Your business earnings are not reduced or shared.

• Through the hire purchace system of finance you pay for equipment by instalment. This will help you reinvest the money you would have used for complete payment.

• The investors provide the small business financing needed to run and expand your business.

• You can get stock of goods for up to sixty days without making immediate payment.

Disadvantages of Small business financing

• Small business financing is an expensive option so it requires security.

• Repaying loan might be difficult for small business that is not properly managed, which is very risky.

• The equipment you have not complete the payment is not your asset and can be subjected to a long-term contract.

• In order to gain the finance, you will have to surrender an equity share in the business.

• Small business financing might dilute your business ownership and control.

Sources of small business financing

Short term small business financing

Short term small business financing are finance that are made avalable to small business up to a period of two years. It enables businesses and investors to take advantage of opportunities which require transactions to be completed quickly. There are different sources of small business finance that are short term, they will be discuss below

 Bank Overdraft

This is when a person withdraws from a bank account and the money withdrawn is more than the available balance. If the person has agreed with the account provider for an overdraft protection plan, and the amount overdrawn is still within the authorised overdraft limit, then interest is normally charged at the agreed rate. But the interest might increase if the money exceeds the agreed terms.

 Trade Credit

Trade credit is credit given to business in form of goods to be paid for after a period of time. Trade credit can be a source of finance for small business because it gives them the time to make use of or sell the goods, raise some money from it before making payment at the agreed time. It is often 28 days but some businesses might not pay for 6 months and on some occasions even a year after they have received goods. When you get the facility of trade credit from a business try to payback at the agreed time so that your creditors will build confidence in you and give you more facilities.

 Credit Card

Credit cards are normally given to business by banks and other financial institutions. Your business credit history has to be taken into consideration before you can be given credit card. Before accepting cards check for the annual percentage rate (APR) compare various cards company to see the best that meets your business needs. Do not be late for your credit card balance payment as this will affect your ability to get credit in the future. If you buy something using a credit card, you will receive a statement once a month with the details of the amount spent during the last month. You then have a certain period of time to either pay the full amount or a minimum amount. Many businesses have a company credit card. It can be a useful way of managing expenses and if paid off in full can be a useful and cheap source of short term finance.

 Bank Loans

Bank loans are very flexible. They can vary in the length of time that the loan has to be repaid. Loans arranged with a bank that are less than one year are regarded as short term finance. As with any other form of loan there are interest payments to be made and this can be expensive and also can vary.

Medium-term business financing

Medium-term finance is like a border between short-term and long-term. This type of finance has a variety of applications such as financing additional working capital, acquisition of fixed assets, etc. This is the type of business finance that provides finance for up to five years and in accordance with a strict set of conditions outlined in a term loan letter of offer by the financial institution and accepted by the client.

Hire Purchase

Hire Purchase is commonly used to finance the acquisition of vehicles or equipment. It involves paying for equipment in instalments and the business will not own the item until all the payments have been made. In terms of the regulations in the Credit Agreements Act, a deposit is normally required and, depending on the acquisition, the period for payment is fixed. The goods purchased are registered in the owner’s name and are always taken as prime security for the debt. The equipment bought on instalment sales is usually more expensive than paying for the equipment at once.

As known as Hire Purchase, it is commonly used to finance the acquisition of vehicles or equipment. It involves paying for equipment in instalments and the business will not own the item until all the payments have been made. In terms of the regulations in the Credit Agreements Act, a deposit is normally required and, depending on the acquisition, the period for payment is fixed. The goods purchased are registered in the owner’s name and are always taken as prime security for the debt. The equipment bought on instalment sales is usually more expensive than paying for the equipment at once.

 Leasing

Leasing is a method of reducing capital funding requirements. A lease is a contract between the owner and the user of an asset. The user does not own the asset but will be paying for using the asset. The user is known as the lessee while the owner is the lessor. They both sign the contract on the agreement on the length of time the lessee may use it and what condition it must be in upon return to the lessor. The amount of payments that will be added if the lessee pays late should also be included in the contract.

Leasing allows maintenance costs to be reduced to a minimum by immediate replacement with new equipment at the end of the lease period. Also plant and equipment are financed over a period directly related to their productive capacity and useful life. There are two types of lease: cancellable and non-cancellable lease. Cancellable lease can be terminated by the lessee or the lessor while non- cancellable lease cannot be easily terminated.

Long-term business financing

Long term sources of finance are those that are needed over a longer period of time. The reasons for needing long term finance are generally different to those relating to short term finance.

 Shares

In finance a share is a unit of account for various financial instruments including stocks, mutual funds, and limited partnerships. A share is a part ownership of a company. It relate to companies set up as private limited companies or public limited companies (plcs). It is possible, therefore, that a small business might start up and have just two shareholders in the business. The development of a plc might at times need to raise more funds. In this case it can issue more shares. Many firms will do this through 'rights issue' which occurs where new shares are issued but existing shareholders get the right to purchase new additional shares at a reduced price. If the business is doing well and the new finance is needed for expansion, this can be an attractive proposition for existing shareholders.

 Venture Capital

Venture capital is becoming an increasingly important source of finance for growing companies. Venture capitalists are groups of (generally very wealthy) individuals or companies specifically set up to invest in developing companies. Venture capitalists are on the lookout for companies with potential. They are prepared to offer capital (money) to help the business grow. In return the venture capitalist takes part in the running of the company as well as a share in the profits made.

 Government Grant

Some firms might be eligible to get funds from the government. This could be the local authority, the national government or the European Union. These grants are often linked to incentives to firms to set up in areas that are in need of economic development. One famous example of how a business project can be developed using European Union funding was the Eden Project. The EU was not the only source of finance to help set up the project but was an important partner in helping to realise this important tourist destination for a deprived part of Cornwall.

 Bank Loans

As with short term finance, banks are an important source of longer term finance. Banks may loan some amount of money over a long period of time - possibly up to 25 years or even more in some cases. The loans have a rate of interest attached to them. For businesses, using bank loans might be relatively easy but the cost of servicing the loan (paying the money and interest back) can be high. If interest rates rise then it can add to a business costs and this has to be taken into account in the planning stage before the loan is taken out.

 Owner's Capital

Some people are in a fortunate position of having some money which they can use to help set up their business. They might have gotten the money as a result of savings, money left to them by a relative in a will or money received as the result of a redundancy payment. This has the advantage that it does not carry with it any interest. It might not be enough to finance the business fully but will be one of the contributions to the overall finance of the business.

 Retained Profit

This is a source of finance that would only be available to a business that was already in existence. Profits from a business can be used by the owners for their own personal use or can be used to put back into the business. This is often called 'ploughing back the profits'. The owner of a business will have to decide on the best option for their particular business. In the early stages of business growth, it may be necessary to put back a lot of the profits into the business. This finance can be used to buy new equipment and machinery as well as more stock or raw materials and hopefully make the business more efficient and profitable in the future.

 Selling Fixed Asset

As firms grow they build up assets. These assets could be in the form of property, machinery, equipment, other companies or even logos. In some cases it may be appropriate for a business to sell off some of these assets to finance other projects.

 Participation bonds

Bond finance for up to 20 years can be arranged for the erection of commercial/industrial property or against commercial/industrial premises owned by you. No capital is repaid for the first five years, only interest. Thereafter the loan is repaid in annual instalments. For bond purposes the value of the property is based on its revenue-producing potential and not on the replacement or intrinsic value of the property.


Guide on Business Finance


Debt Financing
Debt finance provides the necessary tips and guide that will enable a small business owner makes decission on debt, their avalability and impact on his business.


Unsecured Loan

This article provides detail information about unsecured loan. It also provides unsecured loan resources. As an entrepreneur you need to have detail knowledge of unsecured loan.


Start up loans

For guides and tips on loan for starting you business and getting it running why not take you time and read our article on start up loan. The article provides detail start up loan information.


Small Business Administration loan

The small business Administration loan is a United State govement initiaives to small business. This article provides the necessary guide and resources needed to be eligible for the loan.


Equipment Financing

This article provides information and guide on variour ways to finance your small business equipment. Its a must read.


Small Business Loans

Small business loans provides information about how business loans work, the sources of these loans and how to secure them.

In addition to answering these questions you should have in the tip of your finger a well prepared business plan and an in-depth idea of your small business market environment.

why not take your time and read debt financing and also equity fiancing so as to get a broad view of them and see how they can impact on your business and your ability to raise future capital for your business.

Remember that you can also raise capital for your small business in the form of small business grant and government grant.

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