7. Sources and financing

SOURCES OF FINANCING 7

 The capital of a business consists of those funds used to start and run the business. The funds may be either the owner’s  (equity capital) or creditor’s ( debt capital). Capital is also classified, depending on its use, as fixed or working.
Fixed capital  refers to items bought once and used for a long period of time. These items include real estate, fixtures, and equipment.

Working capital refers to the funds used to keep a business working or operating. It pays for merchandise, inventory, and operating expenses such as rent, utilities ( light  and heat), taxes, and wages. Cash on hand and accounts receivable are also considered  working capital. Therefore, working capital is cash, or anything that can be easily and quickly turned into cash.
No firm should ever be started  without a clear and positive understanding of where its total  capital needs are coming from. The various types of financing available  to business firms are usually  classified as: 1. short- term capital. This is borrowed capital  that is to be repaid  within one year. 2. intermediate capital. This is borrowed capital that is to be repaid in one to five years.
3. long – term capital. This is capital whose repayment is arranged for more than five years in the future.

Sources of funds for small firms: equity capital. Personal funds – saved or inherited. Loans from relatives and friends. Commercial bank loans. Mortgage loans. The Small Business  Administration. Venture capitalists.
Equity capital consists of those funds provided to the business by the owners. These funds come from the personal  savings of the small business entrepreneur. In the entrepreneur  decides to obtain more funds through  equity sources, it can be done  by having partners or selling stock. When  these sources are used, however, the small business entrepreneur gives up some ownership control of the business and shares the profits..

Personals funds. Whenever potential creditors, partners, or stockholders are invited to invest in or lend financial assistance to a new firm, their first question is, “how much does the owner have invested?”. Every business contains an element of risk, and outsiders who invest in a new firm wish  to be sure that such risk is shared by the owner. It is important  that the would- be owners ahve assets of their own to invest in the firm. The closer they are to 50 % of the total capital needs that can be provided, the greater will be their independence and share of net profits.

Loans from relatives and friends. Many new owners are encouraged in their enterprise by parents, relatives, or friends who offer to supply loans to the firm to get it started. The best way to avoid subsequent problems is to make sure that loans are made on a businesslike basis.  They should be viewed as business dealings. The right  of the owner to make decisions should be respected by all parties involved.
Commercial bank loans. The commercial bank is one of the main sources of short- term loans. Commercial bank loans are usually for short periods of time ( less than one year), but many banks lend money for longer periods.  The interest on a commercial bank loan is higher than many other sources. The business owner should establish a credit line with a commercial bank. A credit line means that the bank agrees to lend the business owner an amount of money, to a stated maximum, at any time.

Mortgage loans.  If the new firm planners own a commercial building, they can usually  secure a mortgage on it with payments over as many as 30 years. It may be the building in which the new firm operates. In that case, the planners will be making mortgage payments instead of rental payments to a landlord.

The small business  administration is a US government agency organized to aid small business in many ways. This agency  offers small businesses financial aid in the form of guaranteed loans and advice about where financial aid can be obtained. The SBA also offers educational aids and consulting services.
Venture capitalists. This is a term used to refer to individuals or corporations which invest long-term equity and debt capital in promising  start-up and growing  businesses.  Venture capitalists usually  take some equity ( ownership) in the firms for which they  provide funding. Many venture  capitalists only invest in firms that need 100,000 USD or more financing.