THOUGHT OF THE WEEK
TIPS FOR BUSINESS FINANCING (PART 3)
SOURCES OF FUNDING FOR A BUSINESS EXTERNAL SOURCES
The external sources for business financing are a. Loan Capital: there are several forms of loan capital but the most popular ones are bank loan and bank overdraft.
i. A bank loan provides a medium to long-term finance for businesses. Loans allow banks to state a fixed period over which the loan will be provided, the interest rate and the duration of the loan. Most banks require both start-ups and existing businesses to provide some security for the loan. Banks loans are good for financing fixed assets and they have lower interest rates than overdrafts but do not provide much flexibility.
ii. A bank Overdraft: this is a short-term form of financing which can be used by all categories of businesses. An overdraft is a loan facility – the bank lets the business "owe it money" when the bank balance goes below zero, in return for charging a high rate of interest. An overdraft is therefore a flexible source of financing because it is only used when the business needs it. Bank overdrafts are excellent for helping a business handle seasonal fluctuations in cash flow or when the business runs into short-term cash flow problems, (e.g. a major customer fails to pay on time).
b. Share Capital from outside investors: some of the sources of external investor funding in the share capital of a business is family and friends of the business owner. These groups of people are often prepared to invest substantial amounts for longer periods. In addition to this, they may not be interested in getting involved in the day-to-day operations of the business. The disadvantage sometimes is that tension develops with family and friends who are fellow
shareholders in a business.
c. Angel investors: for a startup business, the main kind of external investors are the angel investors. They are professionals who invest in businesses with high growth prospects. Angels tend to have made their money by setting up and selling their own business – in other words they have proven entrepreneurial expertise they also their own skills, experience and contacts available to the business. Getting the backing of an Angel can be a significant advantage to a start-up, although the entrepreneur needs to accept a loss of control over the business.