How To Go About Business Finance

By Author: Secured Lending
Total Articles: 10
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An entrepreneur needs money to start his business. From buying of land to purchase of inventory, everything takes investment. Moreover, one has to proceed with caution about business finance as a single mistake can cause the decline of a business.
The first thing that a businessperson should consider before moving forward with steps required to accumulate the capital is the sources.
Where can he get the money from?
When it comes to sources of finance, there are several available in the market.
They can be categorised into external and internal sources.
Internal sources of capital can be owner’s capital, which could be equity, deposits, and loans given by the owner. If there are partners involved, then the money that they bring in will also be included in internal sources of funds. Another way of raising money from internal sources is by taking loans on personal assets or mortgage loan, provident fund, and other investments that the owner might have made prior to starting the business. Sometimes, businessmen also sell their personal assets to get capital, which is also an internal source.
External sources of business finance refer to the capital that is raised through business loans from various financial institutions such as banks, public deposits, etc. Some of the external sources of funds include shares, debentures, profit retention, trade credits, bank overdraft, accrued accounts, and loans from small lenders.
A businessman must be careful about choosing the sources of finance.
This needs a proper estimation of the costs involved. This brings us to the need for short term and long-term funds. A business needs funds to keep operating on a daily basis. As an entrepreneur, you will have to pay electricity bills, wages, purchase inventory, etc. All this comes under short-term capital funds. One can get short-term funds from commercial banks, public deposits, factoring, bill discounting, bank overdraft etc. There are small business loans Australia lenders provide to aid small businesses, which is also one of the ways many people start their venture.
The long-term funds include investments made on fixed assets such as production equipment, purchase of land etc. The best sources for long-term funds include shares, debentures, profit retention etc.
Once the estimation has been done, the businessman has to consider the cost of capital. This means the money that will be required to get the funds. For example, a loan has its own costs in the form of interest and fee. This will have to be paid in order to get the money.
Therefore, an entrepreneur has to make critical decisions about the sources of finance. From the many sources at his disposal, which one should he approach? Should he borrow from one source or consider multiple sources. The cost of borrowing will vary depending on the sources. The conditions for eligibility and procedures will also vary.
Hence, a businessperson should proceed with caution, as every source will have its benefits and drawbacks. The objective should be to plan the business finance in such a way that the total cost of capital is minimized.
Once he has made proper estimation about the long term and short-term fund, circled in on the sources, and decided how to go about it, can he proceed with the accumulation of funds to finance his business venture.