Business Finanace


Finance refers to the funds required to carry out the activities of a business. It is a crucial issue when an entrepreneur is identifying a business opportunity, especially due to the fact that finance is often difficult to obtain.

Sources of finance:
Finance is available from a variety of sources, but there are two main types of sources available to a business, those being debt and share holders’ equity. To put it simply, the business can either add their own funds (capital or equity), which is an internal source of funds; the business can also obtain loans (debt) from external sources.

    - Debt Finance: This is finance obtain through loans. The main advantage with debt financing is that the owner doesn’t have to sell any ownership in the business; debt finance also has certain taxation advantages. Due to this, debt financing is the most popular source of finance used by people when starting a business. One the type of finance has been selected, the next step is choosing the appropriate term or length of time. There are three main terms for debt financing; those being short term (less then one year, for example bank overdraft), medium term (between one and five years, for example term loans) and long term (greater than five years, for example mortgage).

    - Equity finance (equity capital): This is the funds contributed by the business owner/s to start then expand their business. If the SME is a company, then this contribution is called shareholders equity. This form of finance has an advantage over others for it doesn’t have to be repaid unless the owners leave the business; it is also cheaper, for there are no interest payments, plus any owner who contributes the equity to a business retains control over how the finance is used. Disadvantages of this form of finance are that the owner may expect a good return on his investment, but the small amount of finance may only generate low profits and low returns. There are three ways to gain...