Raising Finance Source of finance Description of source of finance Advantages Disadvantrages Personal sources Peronal sources tend to be the first form of finance used by very small firms. And important personal source of finance is the savings that the entrepreneur accumulated before starting up the business. #Savings are a cheap form of finance as they do not involve paying any interest. #1Jsing savings enables the owner to keep control of the business. This is especially valuable to those owners who are choosing to run a business partly so they can enjoy the independence it gives them.
Setting up a new business is always risky. With high failure rates among new businesses, there is a good chance that an entrepreneur will quickly lose savings that have taken a long time to accumulate. #Many entrepreneurs do no have sufficient savings to finance a new business. Older people are more likely to have accumulate savings but it is often the young who have the most innovative ideas Ordinary share capital Ordinary Share Capital are the resources supplied to the company (equity capital) through the issuance of ordinary shares.
Ordinary shares refer to certificates/ ecurities enabling owners to possess a portion of the company through contributing to the equity capital of the company in the primary stock exchange market, i. e. first- hand trading of shares. Ordinary Share Capital also contribute to a part of the shareholders’ funds #Shareholders have the right to vote #Shareholders have the ability to elect the board of directors #Shareholders are able to buy as many new stocks as possible #Share prices fluctuate a lot, which short term oriented investors find very distressing. Some companies go broke, and due to the occasional dishonest auditor you wont be able to see it coming. Therefore you need to diversify a lot, though this is easyto do since you can buy small amounts of shares. #Shares require analysis and hard work if you are going todo better than average. Venture capital Venture Capital is the capital provided by firms of professionals who invest alongside management in young,rapidly growing companies have the potential for high growth.
Thus a Venture Capitalist (VC) may provide theseed capital for unproven ideas, products or technology-oriented firms. The VC may also invest in a firm unableto raise finance through conventional means. Venture capitalists provide companies with ongoing strategic, operational and financial advice. They will typically have nominee directors appointed to the company’s board and often become intimately involved with the strategic direction of the company. Venture capitalists can introduce the company to an extensive network of strategic partners both domestically and internationally and may also identify potential acquisition targets for the business and facilitate the acquisition. #Most venture capitalists seek to realise their investment in a company in three to five years. If an entrepreneur’s capital may not be appropriate. #Venture capitalists are typically more sophisticated and may drive a harder bargain. Venture capitalists are more likely to want to influence the strategic direction of the company. #Venture capitalists are more likely to be interested in taking control of the company if the management is unable to drive the business. Loan capital such as bank loans Loan capital may be obtained from a bank or finance company as long-term loans, or from debt-equity investors in the form of debentures or preferred stock (preference hares), and is usually secured by a fixed and/or floating charge on the company’s assets.
Unlike debt capital, it does not include short-term loans (such as overdraft). Also called borrowed capital. #A bank loan can be secured quickly; in less than an hour, a qualified borrower can complete a bank loan transaction. #A bank loan can be used in a number of ways; money can be borrowed for many large-ticket items, such as furniture, vehicles or home renovations. #Some loans carry a prepayment penalty, preventing the borrower from paying the note off early without incurring extra cost. There are a number of limitations on the transaction.
Good credit is often required to borrow money, and there are stipulations on how the money can be used. Borrowing too much money can lead to decreased cash flow and payments can even overtake income in some cases; this is why many loan payments are limited to a certain percentage of a borrower’s income. Bank overdrafts Bank overdraft) a short term loan taken out by a company or individual that is normally repayable on demand. #A bank loan can be secured quickly; in less than an hour, a qualified borrower can complete a bank loan transaction.