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SOURCES OF FUNDS
Entrepreneurs and some small businesses usually are not aware of the fact that numerous possibilities and combinations of financial packages can be obtained for funding. It is actually very important to understand not only the various sources of capital but also the expectations and requirements of these sources. Not knowing all the detail an entrepreneur or the small business owner might be frustrated with attempts to find appropriate capital.
Commercial loans, public offerings, private placements, convertible debentures, venture capital and informal risk capital are some of the major terms used in the search for capital.
Entrepreneurs and small businesses must not rely on only one source of financing. Obtaining smaller amounts would be much easier than trying to obtain one source for a large amount. This method is known as layered financing.
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Proper planning should be the golden key to unlock the opportunity of financing sources and you should target sources of funds that suites your particular needs. The following should be included in your plan
What do you plan to do with the money
How much capital is needed
Why is the capital needed
For how long will you need it
How you will repay the loan.
Sources of funds is the following
COMMERCIAL BANKS
About 11 000 commercial banks operate in the United States. Some banks will make unsecured short-term loans, but receivables, inventory or other assets secure most bank loans. Maturity loans of one to five years bank requires collateral in the form of machinery, equipment and real estate. Systematic payments over the life of the loan are required.
DEBT FINANCING
Long term financing can be obtained from manufacturers when particular equipment is purchased.
Short term financing can be obtained by negotiating extended credit terms with suppliers. The same is for Trade credit. Many businesses obtain this type of credit when no other form of financing is available to them.
Factoring is the sale of accounts receivable, under this arrangement, the receivables are sold at a discounted value to a factoring company.
Finance companies are asset-based lenders who lend money against assets such as receivables, inventory and equipment. The advantage of dealing with a commercial finance company is that it often will make loans that banks will not.
PERSONAL SAVINGS
Entrepreneurs should at first try to fund the business/venture out of their own pocket. Usually the lenders or investors wants to know that the entrepreneur put his own money up, this usually is also an indicator that the entrepreneur is willing to risk his money.
FRIENDS AND FAMILY
The second place that entrepreneurs look for money is from his friends or family who just might be interested and willing to invest in the company at a low interest rate. It is recommended that you set up family loans in a business-like fashion This is an excellent source of seed capital and can get a start up far enough to attract further capital from other investors.
ANGELS
Not all venture capital is raised through formal sources such as public and private placements. Many wealthy people in the United States are looking for investment opportunities. They are referred to as business angels or informal risk capitalists. These investors seek other, non-financial returns, among them the creation of jobs in areas of high unemployment, development of technology for social needs.
PARTNERS
Usually partners going into a partnership agreement pool together their private savings. In return, they share in profits.
HOME MORTGAGE
If you own a house that is already mortgaged, you can apply for a second mortgage on the amount of equity you have in the property. Equity is the value of the property beyond the total amount owed on it. The risk involved is that the bank can claim your house if you do not meet your mortgage payments.
CREDIT CARDS
You can borrow for the short-term on credit cards, usually at a higher interest rate than the prevailing interest rate.
LIFE INSURANCE
Some insurance companies will lend you money against the cash value of your life insurance policy.
SMALL BUSINESS ADMINISTRATION (SBA)
These programs offer loans, loan guarantees, and grants to small businesses. The Small Business Association has helped many small businesses get started, including those unable to obtain financing from other sources.
VARIOUS TYPES OF CAPITAL AND THEIR USES
FIXED CAPITAL
Fixed capital is used to purchase a business' s permanent or fixed assets such as buildings, land and equipment needed. Large sums of money are usually invested in these fixed assets and credit terms are lengthy. Lenders of fixed asset capital expect that these purchases will increase the efficiency and profitability of a company to ensure repayment.
WORKING CAPITAL
Working capital is the funds needed to support a business's short-term operations, which include paying bills, pay salaries and wages, buy inventory and other everyday expenses. May be influenced by seasonal changes. Lenders expect that their capital will enable the business to produce higher cash flows to ensure repayment.
Typically, Mi Familia would like to obtain more working capital. The owner Dario Mendoza is working full time at another job an only devote part-time attention to his business. Obtaining growth capital would enable him want to devote his full time attention to growing the business and to earn a salary from the business.
GROWTH CAPITAL
Growth capital is the capital needed to finance an existing company's growth or expansion in a new direction. Companies who experience one of the above are operating the same as a new business. Lenders expect the same return from financing growth capital as for fixed capital. Funds should improve the business's cashflow position to ensure re-payment.
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