Sources of Finance

People seem to consider banks as the only source of finance any businessperson can browse in the financial window markets. However, there are financial opportunities other than the commercial banks. For instance:

a. Building Societies
b. Merchant Banks
c. Mortgage Finances
d. Cooperative Societies
Businesspersons are usually afraid to patronise some of these venture capitalists because, they often request for high percentages of interest on the loans or have shares of the company. However, it is more business-like to take such risk by giving 60 per cent of your business rather than owned 100 per cent of the business that will never be implemented or financed.

It is not always possible to get something from nothing. When you use finance houses, their representatives will want to maximise profit from their relationship with your business. Even in the banks you go to, the banks’ employees, who are addressed in customer-friendly titles such as Manager, Business Manager, and Marketing Manager, are employed to maximise profit for the banks and not for your businesses. Therefore, you need to give up something to be able to get something in place, which is what business is all about.

Securing Loans

Loans are amount of money, which a business obtained from someone who is not a co-owner of the business to be paid back on a specified period. Lenders of funds do always require some securities, which are often called (collateral) to safeguard their funds. These collaterals could be in form of the following:

• Certificate of Occupancy (C of O) for a house, Land, Company etc. 
• Share Certificate of a reputable company 
• Personal assets like cars, Jewelries etc. 
• Letter of set-off (If you have about three million naira in your savings account, and you need about five million naira, the three million will be used as collateral.) Hence, you will be allowed to take a loan of five million, but you will not withdraw from the three million until the five million is fully repaid. 
• Other sources of securing loan for business are discussed below. 

Loans from Friends/Relations

This type of loan might be cheaper, collateral-free, and at times interest-free, but are difficult to come by. It is a type of loan, which involves mutual understanding between friends to assist one another with finances to run their business with a stipulated time of payback. At times, friends never pay these loans back. Thus, the risk of bad debt might be very high and sometimes, it could result to a court case. On the other hand, (with mutual understanding again), interest payment might be deferred or waved depending on their closeness.

Loans from Commercial Banks

This type of loan is quite different from the loans from friends/relations. The interest charged will always be higher, and the ‘loanee’ needs to provide collateral as security for the amount so loaned. Loans from this source are also for a specified period. The banks loans are saved and secured for both the ‘loanees’ and loaners. In the case of the bank, interest payments are not to be defaulted or deferred. Interests are paid as at when due, while the principal sum are also deducted alongside the interest.

Contribution by the Owners of the Business

These are more or less called equities. The business owners contribute their quotas in form of either money or other forms of assets to start the business. The amount so contributed cannot be repaid by anybody except in an event of liquidation of the business. Under this arrangement, nobody charges interest, but rather profits and losses of the business are shared among the owners. In the event of liquidation, the contributors only lose their shareholding in the company, but not their personal belongings as in the case of a limited liability company.

SELF-ASSESSMENT EXERCISE 2

• Discuss the different types of securities that could be offered for a loan in the banks. 
• Mention and explain three different ways through which funds could be raised to start or finance a business.