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Business Funding: Alternative Sources and Strategies

Funding fuels the business industry and allows for its stability and continuous growth. In the current market economy setting with a global market perspective, small-scale businesses encounter difficulties in terms of survival and competition with transnational companies due to the lack of resource capital. With this in mind, this paper seeks to identify alternative sources for funding and other strategies that a small business enterprise [a used bookstore] may use to be able to keep its head afloat the unsteady waters of the business industry.

It is wise to invest in products and services th...

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...at are considered necessary. By necessary, we mean to say that they are needs and not merely wants. While it is true that its obvious examples are to be found in industries that concern food, clothing and shelter, it is also true that education and knowledge are two very important needs if human beings are to survive. A bookstore which provides its customers with quality and affordable used books is an excellent choice for a small business.

Small businesses like the aforementioned usually start from acquiring their capital from the owner and his/her family and close relatives. While this may be helpful for an aspiring entrepreneur, it also has some difficulties in terms of management and decision making. For one thing, a relative who provides funds for the bookstore may invoke that he/she should have the final say on matters concerning the business since he/she provides the capital. Second, there are good reasons to believe that in matters of business, it helps not to involve too much family members. While it is true that family members and relatives may provide support, it is also true that they can be burdensome at times and inimical to the growth and goals of the business.

Fortunately, there are alternative sources of funds that are available to the independent entrepreneur. Small business enterprises may opt considering funding from an outside source: loan creditor institutions by improving their firm-creditor relationship. This may be done by improving what Petersen and Rajan calls the “lending relationships”. This is made possible by the fact that in recent economic theories, there is a significant shift in terms of considering the importance of small-scale industries in economic growth. “Small firms are an important component of the national economy, producing 38 percent of gross national product” (Petersen and Rajan, 1994, p. 5).

Bank financing is an option available for the entrepreneur who wants to keep his/her business not merely surviving but more importantly, growing. It is interesting to note that even in the UK, much of the banks’ decision whether or not to lend a borrower is not so much dependent upon the collateral provided for by the founder/s of a business but with the business’ performance growth and other factors. To further this point, D. J. Storey (1994) wrote the following:

More than four out of five wholly new firms obtaining loan/overdraft facilities from the largest UK bank were not required to provide security, since the monies were below that which the bank felt it worthwhile to secure. This means that the bank is not providing lending based on collateral, and is more likely to be basing its decision upon the characteristics of the founder and other characteristics of the business which can be identified at startup (p. 139).

The foregoing discussion presents us with the practical benefits of alternative sources of funding for small businesses. Recent discussions provide good reasons for the tenability of Storey’s point. Consider Robert T. Hamilton’s (1998) observation:

While the savings of the founders continue to be the dominant source of initial capital, the proportion of businesses dependent on such funding fell from 76 per cent of the oldest firms to 60 per cent of the newest group; a difference in proportions which is significant at the 10 per cent level. The recent increased involvement of financial institutions (mainly banks) in funding new businesses may indicate an improved ability on their part to monitor and control new enterprise lending (p. 239).

The used bookstore owner’s dilemma is that even if funding is readily available because of the fact that the owner has a rich relative providing for the funds, long-term goals may be at risk. In terms of the owner’s autonomy in business decisions and directions, it is difficult to deny the fact that the rich relative, being the source of the funding, almost and always has something to say about them. More so, if the owner seeks business growth and not merely survival as one of its long-term goals, it will be wise to seek funding from an outside source.

References

Hamilton, Robert T. (1998). “The Financing Preferences of Small Firm Owners.” International Journal of Entrepreneurial Behavior and Research. 4:3: pp. 239-248.

Petersen, Mitchell A. and Raghuram G. Rajan. (1994). “The Benefits of Lending Relationships: Evidence from Small Business Data.” The Journal of Finance. 49:1: pp. 3-37

Storey, D. J. (1994). “New Firm Growth and Bank Financing.” Small Business Economics. 6:pp. 139-150

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