Every organisation, business enterprise and manufacturing/service operations require the use of funds in one way or the other. The cost of land, buildings, tools, equipment, materials, supplies, wages, fringe benefits, taxes, electricity bills require the use of funds. Many business persons underestimate the amount of funds required to put business on a profitable basis hence, have little or no knowledge of the best method(s) to source for funds. This inability to appreciate and/or ascertain the financial requirement as well as the best possible means of sourcing for funds has been the chief causes of business failures.
Some concerns source for enough funds to be self-supporting from the very start. Others, however, may need several months or even years before they generate sufficient funds to catch up with the outlays/ operations required. Businesspersons when sourcing/ raising fund for their business should anticipate these contingencies otherwise, the business that might highly be successful may fail without such precautions. In this unit, therefore, we shall be dwelling particularly on the various ways of sourcing/ raising funds for running a business.
The need for funds by the investors, shareholders, employees, managers, innovation, and for expansion revolves around the present finances raised. An efficient and effective funds raising for a business will lead to sound and profitable business. Hence, the knowledge of the sources of funds, its costs and implications become paramount to business individuals in this millennium.
Self-Financing: The only original source of financing is the personal savings (Ndubuisi, 2000). The owner can finance it himself or herself through savings or other available personal resources. He may invest through the purchase of shares or debentures with past savings he has made.
People-To-People Lending: While borrowing from friends and family for business has been long-practiced, new services and markets to respond to the needs of "social finance" or "people-to-people" lending are emerging. In some cases, these online services provide a marketplace between lenders and borrowers. Prosper is a U States- based company that allows you to request a loan and other people can bid on your loan. Zopa is another Unite Kingdom-based version. While the US start up loan back is not a "marketplace" for loan brokering, it provides individuals and small businesses the opportunity to set up and schedule promissory notes and payment schedules.
Grants: In certain circumstances and for small businesses in specific enterprises and niches, sources of funding may be available from government or private sources in the form of grants. Unlike a loan, these funds are typically not paid back to the source. However, grants come with requirements attached. These requirements can range from research results, reports or specific products and services. Grants can be available from a wide array of sources including federal government agencies, state government agencies, or grants from educational or corporate institutions and private foundations.
Ploughing Back of Profits: According to Jain (1999), the process of creating corporate savings and their utilisation in the business is technically called “ploughing back of profits”. It is an ideal method of financing special working capital needs of an enterprise.
Stock Exchange: An entrepreneur can finance a business by getting investors to purchase stocks in the company (although there would be legal problems if it were offered to the public). A partnership can be formed or perhaps a venture capitalist could provide funds if the business venture plans were sound enough. There are some early stage investors called “angel investors” who invest in start up enterprises. Loan can also be taken from friends and relative. In stock exchange, an entrepreneur should realise that if anyone else participates in the venture, some elements of control will be lost. All investors should be aware of the risks involved when one investing in a start up business.
Bank Loans: An entrepreneur can also raise capital for a business using an equity loan on his home or other assets he or she owns. Many entrepreneurs seek bank loan in the name of their business, however, banks will usually insist on a personal guarantee by the business owner. In the United States, the Small Business Administration (SBA) runs several loan programmes that may help small businesses secure loans. In these programmes, the SBA guarantees a portion of the loan to the issuing bank and thus relieves the bank of some of the risk of extending the loan to a small business.
Insurance Companies: Insurance companies have also made a great contribution in providing capital to business enterprises. These companies invest their capital in the shares and debentures of the business enterprises.
In the next unit, you will be taken through the discussion on the types of capital-fixed and circulated/working.
Some concerns source for enough funds to be self-supporting from the very start. Others, however, may need several months or even years before they generate sufficient funds to catch up with the outlays/ operations required. Businesspersons when sourcing/ raising fund for their business should anticipate these contingencies otherwise, the business that might highly be successful may fail without such precautions. In this unit, therefore, we shall be dwelling particularly on the various ways of sourcing/ raising funds for running a business.
OBJECTIVES
At the end of this unit, you should be able to:- identify the needs for funds in a business enterprise
- discuss the traditional sources of funds
- explain the institutional sources of funds.
Need for Funds in a Business Enterprise
On identifying a viable investment, the next line of action is determining the various ways of sourcing for funds for the business. The entrepreneur must see to the proper funding of the business because too much funds is not healthy for a business and inadequate funds is also detrimental to the running of a business. This also anchors on the fact that, excess funds raised will lead to overcapitalisation whereby the earnings of the firm will be spread to large amount of capital assets. In this regard, it is likely that some of the assets will be idle or under-utilised, whereas inadequate funds, will lead to under-capitalisation and suffocation of working capital operations.The need for funds by the investors, shareholders, employees, managers, innovation, and for expansion revolves around the present finances raised. An efficient and effective funds raising for a business will lead to sound and profitable business. Hence, the knowledge of the sources of funds, its costs and implications become paramount to business individuals in this millennium.
SELF-ASSESSMENT EXERCISE 1
- Discuss the needs for funds in any business enterprise of your choice.
Classification of Fund Sourcing
Sources of fund are the sources from which an entrepreneur obtains the funds necessary to start up or operate a business. There are several sources available for such funds (also called capital). They are classified under two categories- traditional and institutional sources as discussed below:Traditional Sources
The main sources for raising funds by an enterprise are as follows:Self-Financing: The only original source of financing is the personal savings (Ndubuisi, 2000). The owner can finance it himself or herself through savings or other available personal resources. He may invest through the purchase of shares or debentures with past savings he has made.
People-To-People Lending: While borrowing from friends and family for business has been long-practiced, new services and markets to respond to the needs of "social finance" or "people-to-people" lending are emerging. In some cases, these online services provide a marketplace between lenders and borrowers. Prosper is a U States- based company that allows you to request a loan and other people can bid on your loan. Zopa is another Unite Kingdom-based version. While the US start up loan back is not a "marketplace" for loan brokering, it provides individuals and small businesses the opportunity to set up and schedule promissory notes and payment schedules.
Grants: In certain circumstances and for small businesses in specific enterprises and niches, sources of funding may be available from government or private sources in the form of grants. Unlike a loan, these funds are typically not paid back to the source. However, grants come with requirements attached. These requirements can range from research results, reports or specific products and services. Grants can be available from a wide array of sources including federal government agencies, state government agencies, or grants from educational or corporate institutions and private foundations.
Ploughing Back of Profits: According to Jain (1999), the process of creating corporate savings and their utilisation in the business is technically called “ploughing back of profits”. It is an ideal method of financing special working capital needs of an enterprise.
Institutional Sources
The following are the main institutional sources for raising capital by an enterprise.Stock Exchange: An entrepreneur can finance a business by getting investors to purchase stocks in the company (although there would be legal problems if it were offered to the public). A partnership can be formed or perhaps a venture capitalist could provide funds if the business venture plans were sound enough. There are some early stage investors called “angel investors” who invest in start up enterprises. Loan can also be taken from friends and relative. In stock exchange, an entrepreneur should realise that if anyone else participates in the venture, some elements of control will be lost. All investors should be aware of the risks involved when one investing in a start up business.
Bank Loans: An entrepreneur can also raise capital for a business using an equity loan on his home or other assets he or she owns. Many entrepreneurs seek bank loan in the name of their business, however, banks will usually insist on a personal guarantee by the business owner. In the United States, the Small Business Administration (SBA) runs several loan programmes that may help small businesses secure loans. In these programmes, the SBA guarantees a portion of the loan to the issuing bank and thus relieves the bank of some of the risk of extending the loan to a small business.
Insurance Companies: Insurance companies have also made a great contribution in providing capital to business enterprises. These companies invest their capital in the shares and debentures of the business enterprises.
SELF-ASSESSMENT EXERCISE 2
- Identify and explain two of each of the traditional and institutional ways of sourcing/raising funds.
CONCLUSION
In our discussion, we realised that money (fund) is a key to any business enterprise. Hence, sourcing for fund has been of great challenge to entrepreneurs. Some entrepreneurs source for enough funds to be self-supporting from the very start. Others, however, may need several months or even years before they generate sufficient funds to catch up with the outlays/ operations required. Businesspersons should anticipate these contingencies when sourcing/ raising funds for their businesses otherwise, the business that might highly be successful may fail without such precautions.SUMMARY
The unit has shed light on the need for funds in a business enterprise. The two classification of sourcing/raising funds- the traditional sources (self-financing, people-to-people, grants, ploughing back of profits) and institutional sources (stock exchange, bank loans, insurance companies), were also highlighted and discussed.In the next unit, you will be taken through the discussion on the types of capital-fixed and circulated/working.
TUTOR-MARKED ASSIGNMENT
- Identify and explain two of each of the traditional and institutional ways of sourcing/raising funds.
- Discuss the needs for funds in any business enterprise.
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