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 ...view middle of the document...
There are three ways to gain equity finance, those being; taking on a partner, or another partner, seeking funds from an investor (future shareholder) or selling off any unproductive asset.
* In relation to my business, we will need to source finance from a number of debts, consisting of short, medium and long term financing, in order to pay the costs involved with establishing and operating the business. The establishment costs that were involved when beginning my business included purchasing our building, equipment (cash registers, computers etc), fixtures and fittings, legal fees, furnishing, connections costs (phone, electricity) and our company car; to pay for the initial deposit on the buildings rent ($8500), fixtures, fittings furnishing ($125 000) and legal fees ($10 000), I took out a bank loan (medium term), and the connection costs ($850) and equipment ($3000) and vehicle ($5 500) I payed using my own money (equity). For the operating costs, this includes wages, rent, electricity, stationary, advertising and insurance, I generally use retained profit or equity, but I also have an overdraft facility, from which I can draw funds from during cash shortages. Any money left over (retained profits) and my own money (equity) I will use to employ strategies and to grow, fund and develop my business.
Cost of finance:
The cost of finance will depend on the following; the types of finance, the source of finance and the term. The type of finance used by a business will influence the cost of capital; for example debt financing requires the use of money form an external source (like bank, finance company ect), and involves interest (cost of borrowing) which is charged by the institution.
If equity finance is a businesses way of raising capital, no interest is charged, for the money has been invested by the...