Cost of the credit
The other important factor to be checked is the capital, since this is the base of the whole discussion; it is most common that knowledgeable lenders will not put money into a new business unless they have concrete evidence that you have personally made a sizable financial commitment to the business. They know from experience that if the venture turns bad it will be easier for you to back out if you do not have your own money at risk. From your personal resources, you should try to provide as much of the needed capital as you can afford to put at risk.
Depending on the capital needs, the external finance cannot finance over to finance over 80% of capital. This clearly indicates to the entrepreneur to look for other sources. The factors mentioned above form the five C’s of finance. (GAO, 2002) From the discussions above one can clearly analyze if they can qualify for a loan or not and if not then he can try to improve on the areas of inefficiencies to increase his chances. The following are the different sources of finance for his business.
There are many sources of capital for the small business with good potential. However, there is no substitute for putting your financial assets on the line in starting your own business. Securing capital for any new business will require well-developed business plans, financial projections and knowledge of sources of financial support. However, like any small business person, commercial lenders are also in business for profit. ( http:www. umext. maine. edu/resources. htm) There are different types of finance sources that available for small businesses .
It therefore depends on the kind of enterprise, some need finance for long term, short terms or medium terms. The entrepreneur’s knowledge of the type of the types and amounts of money needed shall help him in choosing the correct source of finance from the list below. The person can either choose to use the equity capital or debt capital, in his case he can decide to use equity. This is because he can decide to sell a portion of his business by business to other people who have money but and he will still have the ownership.
The equity investors only invest in the business for a portion of the interest; this will enable him to get enough finance for a start. Although it is a good idea but it has some cons, in that the new investors will have a hand in the management of the company and might make some decision that only fits them within their term in office. Debt capital is also another way of getting finance for a good start or small expansions; however it will drain the income of the business while repaying. (http:www. umext. maine. edu/resources. htm)
The person can also decide to go for a commercial loan to boost her business. These are loans that are always given by commercial banks to their clients. The commercial loan can either be for a short term, long term or for medium terms. He must analyze the business better be fore deciding to venture into this option, this is because to access the option needs some collateral that must be marketable and valuable. The other disadvantage for this source of finance is that the interest rates are usually high interest rates which must be paid back. (Ogier and Rugman, 2004)
There are other sources of capital as; Trade or supplier credit, the person can depend on the payment terms offered by the supplies. One has to plan for the use of this new trade credit. The other source can be through the use life insurance policies- this is a good source of capital in that it is always coupled with the feature that allow owners to borrow against the value of the policy(Ogier and Rugman,2004) Payment terms offered by your suppliers are a potential source of credit. Study the discounts for early payment and the penalty for late payment to determine the true cost of the credit.
While some suppliers will extend credit only to well-established, proven firms, many will extend limited credit to new businesses to encourage another outlet for their merchandise. Planning for use of trade credit is essential. To establish good trade credit, a new business must make timely payments as agreed. Trade credit is effectively used by large businesses to buy products at lower cost than small firms. Do not depend too much on trade credit from one supplier. If repayment problems arise, you may find your major source for supplies cut off when you need it the most( ( http:www. umext. maine. edu/resources. htm)
There are other ways of getting finance through the use of customer’s money that pay in advance; the money can be used in the purchases and additional of more stock before the customer. It can only be efficient in large business that has a good liquidity ratio. The person can also get capital goods and through leasing business equipment. This will reduce capital needs. Although it is a good method, it is generally more expensive than bank financing and is limited to items that have a long serviceable life, widespread use, and are easily repossessed in the event of default.
In many cases, you have the option to buy the equipment for an agreed upon amount at the end of the lease period. .( (http:www. umext. maine. edu/resources. htm) For the business there are other sources like the commercial finance companies which are generally seen as the place to go when you are unable to secure financing from a bank. Commercial finance companies, like banks, are concerned with your ability to repay the loan; however, they are more willing to rely on the quality of the collateral rather than your track record or profit projections.
This can always be substituted by finance from commercial banks, they are good lenders but so conservative. (. ( (http:www. umext. maine. edu/resources. htm) He can also obtain finance from small Business Administration which is an independent government agency formed to assist small business. They support by providing collaterals to small business. It is highly recommended for small businesses because their interest rates are low of all the other sources, other sources are the Rural Economic and Community Development Agency and small business investment companies. ( http:www. umext. maine. edu/resources. htm)
McConnon advices that the current source of funding is not the best (friends and relatives) since some relatives can decide to withdraw their financial support if there are some quarrels while others may also consider the business as their personal property. It is advisable therefore to use formal and legal approach. Reference: Ogier Tim and Rugman John, (2004). The real cost of Capital. Financial Times. Prentice Hall GAO, (2002 ,Small business efforts to facilitate Equity Capital. Dianne Publishers Mc Cannon, http:www. umext. maine. edu/resources. htm (2005), University of Maine Cooperative Extension. Retrieved on the 3rd July 2008