Sources Of Finances Course Work Example
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Business activities range from small-scale, medium, and large-scale businesses. In the current world, almost everyone looks forward to starting up a business. Businesses opportunities are so many, and they come at different times of the year. Some are worth investing at certain times while others are not. For this reason, there is a need to be prepared for the right opportunity. The greatest impediment why some just get an opportunity, but due to financial constraints, they set aside. Capital is what many people lack thus fail to progress in the business field. People with potential can venture into business with the aid of one of the following sources.
The most common source is the owner’s capital. Some individuals have been working and accumulating capital for quite some time and thus are able to raise some funds to set up a business. Some get these funds from a will left to them by their relatives, or money obtained because of redundancy payment. This has the benefit of not carrying any interest. However, the sum might not be large enough to finance a business, but is one of the contributions to the general development in business market. When you compare this with the other sources, it can be the most accessible to everyone since there are no interests attached to it. The only disadvantage is that one cannot win the trust of well-wishers especially in difficult situations, hence the business can fall anytime (Buckle et.al 158).
Retained profits are precisely sources that are used by businesses that are in existence. The gains from the business are usually used by the owners for private use or in some cases; they might decide to increase the business by ploughing back the profits. Small-scale businesses during their initial stages state clearly, what they want in business and thus strategies on how to grow. The owner in this case is the sole decision maker on what to do with the profits. Most a times, they use profits to buy equipments, stock or raw materials and optimistically make the business efficient and profitable in the future. This is a bit technical when compared to other sources because if the owner has no plans he/she can misuse the funds and when the business need extra sum, there is little or not available at all. (Wolfe 11).
Selling assets is also another source of finance to small-scale businesses. As the business grows, it builds up assets in the form of machinery, property, equipments, and logos. In some situations, it might be necessary for the firm to sell off some of the assets to assist in the development and expansion of other viable projects. This type of source might not be appropriate when funds are needed urgently. The owner has to find a suitable buyer of which it could take a lot of time. It is therefore, essential that this is only used when expanding the business or when a section of the business is does not conform to the initial strategy and direction of the business. In addition, small-scale business do not have enough resources to purchase big machineries or properties, thus when they want to sell they might only get little funds through selling of their small value assets. Comparing with the first sources, this might not satisfy all the needs of the business.
Bank loans are the most viable of all since different banks offer varied range of amount as per the customer specification and their credit worth. Banks are vital sources of long-term finances. The advantage of this is that they can lend whopping sum of money to organizations or even to trusted individuals for an exceedingly long period of up to 25 years or more. Within this period, the business will be supported, and thus able to grow remarkably fast. The loans however, attract interest rate depending on the standard rates set up by the bank of England. For businesses, applying bank loans can be a relief to the business owners, but the cost of servicing the loan can be a traumatizing experience. Increase in interest rates can add unnecessary cost to the business and should be taken into consideration during the strategic planning of the business (Wolfe 12).
Mortgage is the other source and is a loan directed to the purchase of property. Some firms in their plans to expand can decide to buy property through mortgage. Often mortgages are applied as a security for a loan and are applicable to small businesses. The borrower can use their private property to secure these loans. Despite the fact that these loans helps the business to grow fast because of accessibility to quick cash, its setback is that in case the business does not prosper, the bank has all rights to take the private property and sell it at whatever cost to reclaim their funds. Using a mortgage is a common source of raising funds but it has many risks in case of default. The other advantage of this type over the others is that the mortgage firms can assist one in the development of the structures so the owner can do other things meanwhile, their rates are also negotiable depending on market demand (Buckle et. al 159).
Shares are also a common source of finance to the small-scale business. Shares are associated to companies but potential small investors can also access the funds without much restriction. The small business can grow to big companies and at some stages; they may want to still expand. At such a point, they can consider becoming public limited company to issue shares to the public. This is referred to as floating the business and the company has to go through a number of legal and administrative stages for their rights to be granted and issue shares to the public. When the shares have been sold, shareowners can trade their shares at the stock market. Such buying and selling cannot affect the business directly and is the chief advantage of the stock exchange. This source of finance is essential when the business is doing well, and more funds for expansion are required. It provides a comparatively fast and cheap method of raising additional funds. This source of funds is disadvantageous since it is applicable to fast growing organization of which small-scale business might not attain that easily (Wolfe 13).
Government grants are also common sources of finances in the UK to individuals and organizations that are eligible for such funds from the government. This could be local authority, the national government, or the European Union. These grants are frequently joined to incentives to firms to develop their base in regions that are in need of economic development. Cornwall for instance is an example of such regions that the government has used various initiatives to encourage investors to set their businesses there. Organizations seeking to set up their operations in remote areas are able to apply for help in starting or transferring their activities to such an area. The major disadvantage of this is that it involves a lot of paperwork and administration, adding to the operation cost and might not make the project worthwhile. On the other hand, not like the other sources, the investor can get a lot of support and sponsors who are even willing to incur that extra cost and there is no interests charge on such funds. They will also provide the necessary labor to manage the operations and the implementation process. Once the business is established, the EU will leave everything in the hands of the business (Shippey 132).
Consequently, we have venture capital, which is increasingly gaining momentum for the small-scale business. Venture capitalists are sets of (usually extremely wealth) people or organizations particularly created to invest in upcoming businesses. They are on the lookout for firms or individuals with potentials. They are willing to give capital to assist the business to grow then in return, the venture capitalists get access to running of the firm as well as sharing the gains made. The benefit of this as compared to others is that the venture capitalists are usually willing to support projects that have high risks and the banks fear getting involved. However, this may be overpowered by the likelihood of the business losing some its sovereignty in decision-making. Funds can be sufficient but just like the government grants; the capitalists do not give the business independence (Ogilvie 378).
In addition, we have lottery funding. The national lottery can be an essential source of funds to some businesses. These businesses are mostly charities or charitable trusts. These nonprofit organizations are out to help stimulate the economic development of the country, and at the same time utilizing the available resources to improving the living standards of the people (Wolfe 13).
