Kasomi
JF-Expert Member
- Sep 3, 2014
- 11,030
- 20,391
For carrying out various activities, business
requires money.
• Finance, therefore, is called the life blood of
any business.
• A business cannot function unless adequate funds are made available to it.
• A business person, therefore, has to look for different other sources from where the need for funds can be met.
Why money (finance) is needed?
• The financial needs of a business can be
categorised into: Fixed capital requirements and working capital requirements.
Fixed capital requirements
•In order to start business, funds are
required to purchase fixed assets like
land and building, plant and machinery, furniture and fixtures.
• This is known as fixed capital requirements of the enterprise.
Working capital requirements
•No matter how small or large a business is, it needs funds for its day-to-day operations.
• This is known as working capital of an enterprise, which is used for holding current assets such as stock of material, bills receivables and for meeting current expenses like salaries, wages, taxes, and rent.
Finance and financing
• The term “finance” refers to funds or
monetary resources needed by individuals, businesses and the government.
• Financing is the use and manipulation of money.
• Raising funds is one aspect of financing.
• Before making the financing decision, an entrepreneur should clearly answer the following questions:
•How much money is needed?
• When does the money need to be available?
•Where will the money come from?
Sources of Business Finance
• There are different forms of raising funds open to the entrepreneurs.
• The various sources of funds for business ventures are explained in the following categories
1. Personal Saving
• Personal savings is the amount of money a person has at his disposal.
• It becomes a source of finance when the sole trader or a partnership member is willing to invest it in his business
• Lenders and investors expect entrepreneurs to put their own money into a business start-up before they are involved.
2. Family and friends
• Because of their rela3onships with the founder, these people are most likely to invest.
•Often, they are more pa3ent than other outside investors.
3. Angel investors
• These private investors are wealthy individuals, often entrepreneurs themselves, who invest in business start-ups in exchange for equity stakes in the companies.
• They are willing to put money into companies in the earliest stages long before venture capital firms and institution investors jump in.
4. Partnership
• This is a source of finance suitable for a partnership business.
• The new partner can contribute extra capital.
5. Venture capital gains
• Venture capitalists are private, for-profit organizations that assemble pools of capital and then use them to purchase equity positions in young businesses they believe have high growth and high profit potential.
6. Initial Public Offering
•In an Initial Public Offering (IPO), acompany raises capital by selling shares to fits stock to the general public for the first timeme.
•Once a company makes an initial public offering, nothing will ever be the same again.
• Managers must consider the impact of their decisions.
7. Retained earnings
• A business exists to make profits.
• Those profits can be either withdrawn by the owners of the firm or reinvested to expand the business.
•If a business person decides to keep the profit for the company, this source of funding is called retained profit.
8. Lease financing
• A lease is a contractual agreement whereby one party i.e., the owner of an asset grants the other party the right to use the asset in return for a periodic payment.
•In other words it is a renting of an asset for some specified period.
9. Sale of Assets
•If a business needs money, it can dispose of some of its assets, selling machinery, land, buildings, tools and other assets not vital for the existence of a firm.
•However, assets normally are required for a business to expand, and so selling them can only be a temporary source of Finance.
10. Bank loan
• This is money borrowed at an agreed rate of interest over a set period of Time.
•It can be expensive due to interest payments.
• Bank may require security on load e.g.collateral.
Bank lending decision
• Banks are generally cautious in lending money, particularly to new ventures, since they do not want to incur bad loans.
• The bank lending decisions are made according to the five Cs of lending:
character, capacity, capital, collateral, and conditions.
Capacity
•In this, past financial statements are Reviewed in terms of key profitability and credit ratios, inventory turnover, aging of accounts receivable, and the entrepreneur capital invested and commitment to the business.
• Future projections on market size, sales, and profitability are also evaluated to determine the ability to repay the loan.
Character
• The lender establishes whether or not the borrower is a person of integrity and honesty.
• The past borrowing behavior can be evaluated, together with paying other bills
Capital
• The lender will be keen to know the amount of capital the borrower has.
• This refers to the cash and other assets owned by the business or the borrower.
Collateral
• The creditor will want to know if the loan will be secured.
• Collateral security is property that could be sold out to pay for the loan in case of default.
Conditions
• The lender also takes into account the prevailing economic condi3ons of the country.
• These may include level of competition, inflation rate, new legislation etc.
11. Trade credit
• The company buys materials from suppliers on credit.
• The outstanding amount payable to suppliers is regarded as source of finance.
• It is not thought of as a loan, yet the fact is that the seller is financing the buyer for the period of time between the receipt of goods and the payment of the bill.
Those are some Funds Used in Business
requires money.
• Finance, therefore, is called the life blood of
any business.
• A business cannot function unless adequate funds are made available to it.
• A business person, therefore, has to look for different other sources from where the need for funds can be met.
Why money (finance) is needed?
• The financial needs of a business can be
categorised into: Fixed capital requirements and working capital requirements.
Fixed capital requirements
•In order to start business, funds are
required to purchase fixed assets like
land and building, plant and machinery, furniture and fixtures.
• This is known as fixed capital requirements of the enterprise.
Working capital requirements
•No matter how small or large a business is, it needs funds for its day-to-day operations.
• This is known as working capital of an enterprise, which is used for holding current assets such as stock of material, bills receivables and for meeting current expenses like salaries, wages, taxes, and rent.
Finance and financing
• The term “finance” refers to funds or
monetary resources needed by individuals, businesses and the government.
• Financing is the use and manipulation of money.
• Raising funds is one aspect of financing.
• Before making the financing decision, an entrepreneur should clearly answer the following questions:
•How much money is needed?
• When does the money need to be available?
•Where will the money come from?
Sources of Business Finance
• There are different forms of raising funds open to the entrepreneurs.
• The various sources of funds for business ventures are explained in the following categories
1. Personal Saving
• Personal savings is the amount of money a person has at his disposal.
• It becomes a source of finance when the sole trader or a partnership member is willing to invest it in his business
• Lenders and investors expect entrepreneurs to put their own money into a business start-up before they are involved.
2. Family and friends
• Because of their rela3onships with the founder, these people are most likely to invest.
•Often, they are more pa3ent than other outside investors.
3. Angel investors
• These private investors are wealthy individuals, often entrepreneurs themselves, who invest in business start-ups in exchange for equity stakes in the companies.
• They are willing to put money into companies in the earliest stages long before venture capital firms and institution investors jump in.
4. Partnership
• This is a source of finance suitable for a partnership business.
• The new partner can contribute extra capital.
5. Venture capital gains
• Venture capitalists are private, for-profit organizations that assemble pools of capital and then use them to purchase equity positions in young businesses they believe have high growth and high profit potential.
6. Initial Public Offering
•In an Initial Public Offering (IPO), acompany raises capital by selling shares to fits stock to the general public for the first timeme.
•Once a company makes an initial public offering, nothing will ever be the same again.
• Managers must consider the impact of their decisions.
7. Retained earnings
• A business exists to make profits.
• Those profits can be either withdrawn by the owners of the firm or reinvested to expand the business.
•If a business person decides to keep the profit for the company, this source of funding is called retained profit.
8. Lease financing
• A lease is a contractual agreement whereby one party i.e., the owner of an asset grants the other party the right to use the asset in return for a periodic payment.
•In other words it is a renting of an asset for some specified period.
9. Sale of Assets
•If a business needs money, it can dispose of some of its assets, selling machinery, land, buildings, tools and other assets not vital for the existence of a firm.
•However, assets normally are required for a business to expand, and so selling them can only be a temporary source of Finance.
10. Bank loan
• This is money borrowed at an agreed rate of interest over a set period of Time.
•It can be expensive due to interest payments.
• Bank may require security on load e.g.collateral.
Bank lending decision
• Banks are generally cautious in lending money, particularly to new ventures, since they do not want to incur bad loans.
• The bank lending decisions are made according to the five Cs of lending:
character, capacity, capital, collateral, and conditions.
Capacity
•In this, past financial statements are Reviewed in terms of key profitability and credit ratios, inventory turnover, aging of accounts receivable, and the entrepreneur capital invested and commitment to the business.
• Future projections on market size, sales, and profitability are also evaluated to determine the ability to repay the loan.
Character
• The lender establishes whether or not the borrower is a person of integrity and honesty.
• The past borrowing behavior can be evaluated, together with paying other bills
Capital
• The lender will be keen to know the amount of capital the borrower has.
• This refers to the cash and other assets owned by the business or the borrower.
Collateral
• The creditor will want to know if the loan will be secured.
• Collateral security is property that could be sold out to pay for the loan in case of default.
Conditions
• The lender also takes into account the prevailing economic condi3ons of the country.
• These may include level of competition, inflation rate, new legislation etc.
11. Trade credit
• The company buys materials from suppliers on credit.
• The outstanding amount payable to suppliers is regarded as source of finance.
• It is not thought of as a loan, yet the fact is that the seller is financing the buyer for the period of time between the receipt of goods and the payment of the bill.
Those are some Funds Used in Business
