Businesses cannot operate without money. Once entrepreneurs decide on the type of business and products they want to engage in, they definitely need funds or capital to guarantee smooth running of the business. These funds can be got from borrowing from friends or relatives but one is never certain that they will get the money and that is why there are micro finance institutions, banks and other money lending institutions that give individuals options to choose from depending on the kind of business one is undertaking (The ABC’s of Borrowing, 2009).
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There are various financing options that will enable one to get funds for their business. One of these funding options is loans from the commercial banks. These loans may be long-term or short term. Short term loan are used to pay the bills, taxes and basically money for running the business. Long term loans are used to purchase the business assets which may be buying the building, firm machinery and equipment. Because we will be focusing on a business that is starting up, our focus will be on two short-term funding options.
Small businesses especially those venturing in something new can get unsecured loans from banks and funding institutions. Unsecured loans can be got in the name or on behalf of a business. They work in such a way that under personal unsecured loans the applicant will have to pay the loan, under business loans the business is responsible for payment and in personal guarantee the incase of debt the bank will acquire the business little gains and assets and later deal with the individual.
The benefits of getting unsecured loans are: the process of application is easy, one does not need collateral. One an easily pay the loan because it is a small amount and this will be a stepping stone to obtaining long-term loans. The disadvantages are: it takes long to convince the banks that they can manage money well because of the investigation process before being considered, the interest is high and one is given a short time to pay off the loan (Moore & Gooderl, 2008).
Trade credit is another form of getting funding whereby a business enters into agreement with its clients/suppliers where they will provide them products or services and the business will pay for them later. When a business is starting up, the people who will be supplying products will want to know the business payment patterns to see if one can be trusted to be given trade credits (George, 1999).
The benefits that cone with trade credit are that one can be given discounts on commodities purchased especially when dealing with specific suppliers for a long time, it s cheaper compared to other forms of loans that require collateral and ensures continuity of the business in terms of production and proper balancing of accounts. Some of the risks involved with trade credits may be over reliance on them and will be forever in debt and in case of default in payments, the supplier may stop dealing with the business and this will lead to the collapse of the business
Looking at the many advantages of these short term borrowings it differs from borrowing from relatives since it is strictly professional in that there is no emotional connection between owners of the business and individuals giving loans. When we deal with relatives we want them to feel the challenges affecting us and when a businessman takes advantage of this situation and relatives may become enemies and this is not good for business. Moreover, they may have loaned out money and want it back sooner than later to spend. This is why the trade credit and unsecured loans are better as they have an allowance on the payment period, one will be challenged to work harder and produce better results to enable them to pay off loans.
Short-term loans will benefit a business for a while and if it is seriously focusing on progress, profits and expansion, it will need to think of future funding. Obtaining long-term loans will be the next logical step and advice can be sort from successful businesses or from loan offering firms to see what will work for them and how one can go about it. We can therefore talk about debt financing that entails borrowing larger amounts of money to buy better equipment and run your business or equity financing where part of the growing business is sold to an interested party in order to raise funds (Ebert & Griffin, 2005).
In conclusion, funding is very necessary for any growing business and the methods used to obtain the funds should be thoroughly looked at from every angle to ensure that they are beneficial to the business and not destructive.
ABCs of borrowing money. Retrieved on 29th January, 2009
Ebert, R.J., & Griffin, R.W., (2005). Business Essentials.
Upper Saddle River, NJ: Pearson Prentice Hall.
George E.R, (1999) Commercial Lending. Ed: 4
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Moore C.W., & Gooderl .W.J, (2008) Managing Small Business: An Entrepreneurial Emphasis. Cengage Learning EMEA