Sources of finance simply means various reliable ways by which a business can raise money for the smooth running of business activities without much friction.
Majority of businesses out there are often hindered by lack of finance to execute vibrant projects that will otherwise contribute positively to the bottom line of the company. This is not to say that finances cannot be raised to keep a business running smoothly. The problem is that many managers of small and medium sized companies lack the knowledge of the variety of ways that funds can be raised to finance its non-current assets.
In financing non-current assets, matching principle is applied so that the companies don’t run into financial difficulties. Find below eleven ways to raise finance for your fixed assets.
SOURCES OF FINANCE
- RETAINED EARNINGS: Companies can finance their project(s) through funds that have been withheld from previous periods’ earnings. This is usually referred to the cheapest form of financing that a business can fall to first before looking outside of the company. This in finance theory is known as pecking order theory. The validity of this theory is still question as there are still not much empirical evidences supporting it.
- LEASING AND HIRE PURCHASE: These can be considered for small assets. It could either be finance or operating lease. The benefits of using this source of fund includes the right to engage in an off balance sheet financing. This benefit is however diminishing as the accounting standard setters are proposing to make changes that will make it almost impossible for operating lease to be practical.
- SECURED LOANS: Depending on the nature of the asset, it may be possible to secure a loan tied to that asset(s). This is the direct opposite of floating loans. Many finance companies are springing up in recent time to target this need of small companies.
- PERSONAL SAVINGS: Certain fixed assets like computers and cars can be financed from personal savings. The major disadvantage of this form of raising finance is that there is a limit to the amount that can be raised through this way- except for the super rich.
- GRANTS BY GOVERNMENT: Grant is a sum of money given to an individual for a specific project or purpose. Some conditions have to be met for this grant to be obtained. There are also some cash flow implications to this form of raising capital.
- VENTURE CAPITALISTS: Venture capitalists are companies that set out some money periodically to invest in risky but promising ventures. Google and some other big shots have recently joined the league. They provide money to start-ups in expectation of abnormally high return. They get the abnormal returns through the sale of their interest in the company to the general public or through an initial public offer (IPO), or still to another company in a trade. They screen good investing opportunities and entrepreneurial teams from the bad ones. This implies that a small that wants to raise fund through this means must meet certain standard.
- BUSINESS ANGELS: This is usually a group of wealthy individuals that specialize in investing in start-ups and small businesses. This is similar to the venture capitalists discussed earlier with the only difference being that business angels are composed of few wealthy individuals while VCs can be a company.
- MORTGAGES: Non-current assets like buildings can be financed through this method. This form of financing might not be so suitable for all forms of small businesses as there are still some hurdles that needs to be crossed to get money.
- ALTERNATIVE INVESTMENT MARKET (AIM)/ SECOND TIER MARKET FLOATATION: This is a form of capital market where users of fund that does not have access to the full fledge capital market goes to for their financing needs.
- ENTERPRISE CAPITAL FUNDS (ECF): This body was launched in the UK in 2005. This is equivalent to the Small Business Investment Company (SBIC) of the US that has been around for about 47 years now. The SBIC has supported the early growth of companies like; AOL, Intel, Fedex, Apple etc.
- FUNDS FROM INFORMAL NETWORKS OF; FRIENDS AND FAMILY MEMBERS: Informal network of friends may include some weak-ties that can come from our friend friends. This is an often neglected source of fund/finance for small and medium sized companies, yet so powerful that investments up to £500,000.00 can be financed through this medium if well harnessed.
Edit: added on 02/02/2015, you can call this the 12th source of finance. Crowd funding is another way of raising money for a novel idea that other will be willing enough to give out their money in order to make sure that it succeeds. As a small business owner, you can turn to the crowd funding community to raise money if you have really and intuitively appealing idea.
Note that the above listed sources of finance can also apply to big businesses with slight modifications to suit the specific need of the company in question. I am sure that you find the article interesting and informative. Just keep a date with us as this blog is constantly updated to enrich your financial toolkit.