Lending institutions are happier to lend when a firm is doing well and vice versa. So when there are bad times, the Sole Trader finds it difficult to raise funds if he or she had already pledged the available personal assets. It is therefore all the more important that the Sole Trader manages working capital with extreme care and prudence. Sourcing of funds by Company A Company brings external funds through short term and long term strategies. Long term funds are known as Share capital and Short term funds are known as Loan capital.
Money put in by owners against shares issued or together with money obtained by issuing shares to the public is known as share capital. Shares represent proof of ownership of the company by holder(s), proportionate to the shares held. Each shareholder has a stake in the company and the right vote in annual meetings, besides right to receive dividends declared by the company. Shares can also be sold, often at a price higher than the face value (in profit making companies).
Shares can be issued privately and also to the public. The former applies in the case of private companies and the latter in the case of Public companies. Whenever there is a requirement for additional funds in a running Company, issue of additional shares is one of the options open. The advantage of floating shares is that large amounts can be raised for investments. Options to avail of Mortgage loans, long term loans or resort to Hire purchase or Overdraft, as in the case of Sole Traders are also available to Companies.
In addition to this, Companies have the following options to raise funds which are not available to Sole Trading or Partnership firms: Venture Capital Venture capitalists are organizations providing long term loans to Companies. They take higher risks in lending than banks that relies on securities pledged. Such loans are granted based on a sound business plan that reveals the capability of the company repay. Debentures Companies can also raise funds through issue of Debentures.
Debentures are fixed period loans with commitment to pay declared interest throughout the period for which these are issued. Issue of Debentures is permitted against security of specified company assets. Debentures have to be redeemed upon completion of the specified period. Conclusions We have noted that, for a given output, any organization should plan to minimize fixed assets to make available the required working capital.
Judicious management of working capital is very important for any type of organization irrespective of the structure of formation such as Sole Trader, Partnership or Company. Loss arising from inefficient management of working capital will be more difficult to overcome for the Sole Trader than a Company as the latter has more avenues to raise rehabilitation funds.
How To Books Co. (Web page) (Accessed 23 July 2007). Becoming a Sole Trader. Available from. http://www. howtobooks. co. uk/employment/self-employment/sole-trader. asp