Business financing is a very crucial part of business management. The profitability, the success of a business depends greatly on the amount of finance coming into the business. Finance is needed in starting up any business venture and for the continuous running of the business. The size of a business is equivalent to the financial inflow of that business.
FINANCIAL DECISIONS OF A BUSINESS VENTURE
Financial decisions involve any decision that is finance related. It involves decisions about raising funds, sources of raising funds that are open to the business venture and the right time to source for funds.
Financial decisions can also be investment decisions. That is decisions on asset availability and which assets to invest in. investment decisions aid effective use of financial resources.
WAYS OF RAISING FINANCE?
Ways of raising finance for a firm could be via internal or external sources.
Internal sources of funding a business venture include;
1. PERSONAL SOURCES: This refers to the personal savings of the owner of the business. Funding a business venture from personal savings is the safest method of business funding although limited only to the amount the owner has in his or her savings.
2. SELF FUNDING:This is the finding of a business with the amount generated by the business venture itself via previous profit earnings. It is the easiest, most common and permanent form of funding.
3. FRIENDS AND FAMILY: Here, the business owner solicits for funds from friends and family in which case it can be given as a gift or as a loan. This form of business financing can affect personal relationships if the owner fails to pay back loan on time.
External sources of funding a business venture include the following;
1. BANK LOANS:Just as the name implies, the business owner formally solicits for loan from the bank in order to meet the business financial needs. Bank loans usually require the owner to pay a particular amount as interest upon returning the loan. The business owner is also required to present a form of guarantee referred to as collateral which is mostly fixed. The asset is taken over by the bank if the loan is not redeemed at the agreed time. If you own a small business and don’t have a collateral but need a loan however, kindly check out my post on microfinance.
2. BANK OVERDRAFT: This is a type of loan where the owner the loan seeker is expected to have a current account with the bank, a bank that trusts the customer to an extent based on his financial history with the bank. In this case, the borrower is allowed to borrow funds in excess of the credit balance in his current account up to a particular amount. This type of loan is short term and comes with an interest rate determined by the bank.
3. TRADE CREDITS: This is a situation where the buyer for goods and services is allowed deferred payment for goods and services bought. This simply means the buyer is allowed to take goods and services on credit and make payment later at a time agreed upon by both parties. This source of business funding is based on the seller’s trust for the buyer. In this case, the seller must be financially sufficient and the liquidity of the buyer’s business must be promising enough to guarantee payment as at when due.
4. EQUITY: This is a situation whereby the business owner sells part of the business to the public. The buyer becomes a shareholder in the business or firm. Money gotten from this arrangement is referred to as equity. The shareholder gets all the benefits and cash flow associated with the equity stake at the end of the accounting period.
5. GOVERNMENT GRANTS: This refers to financial aid by the government for starting and expanding businesses. This is aimed at encouraging creative business ideas and enhancing job creation in the country.
In conclusion, you should always seek advice from a financial adviser on what type of funding is best for your business at a particular time, one that has less risk.
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