Sources of finance for small businesses
Sources of finance for small businesses
This article explores some of the sources of finance for small businesses. Businesses need finance not only to run the day-to-day operations but also to support any growth opportunities. However, it is often difficult to raise money for start-ups. Therefore, these businesses should explore different sources so that the chances of getting appropriate finance are higher and of course diversified.
Factors to consider when choosing a source of finance
There are a number of factors that need to be considered when choosing a source of finance. For instance:
How much money is required?
How much is the cost of finance?
When and how long is the money needed for?
What is the purpose of finance?
Are the owners ready to give up some control of their businesses to raise the money they need?
Answers to the above questions should help small businesses decide whether any of the following sources of finance are suitable for them.
Sources of finance for small businesses
Family and friends
Perhaps the easiest way for entrepreneurs to finance their businesses is through borrowing money from their families and friends. Parents, siblings, friends, and extended relatives may be willing and capable to help them. It is worth noting that this type of finance is useful as it is almost always without any interest or string attached to it!
Share capital
The owners may decide to finance a business by investing in its share capitals. This helps them retain control over the business. Likewise, they can sell some shares to external investors who are usually more interested in dividends rather than controlling the business.
Bank loan and overdraft
Sometimes personal sources may have been exhausted. Likewise, in difficult times, investors may not be interested in buying shares. In such circumstances, entrepreneurs may reach out to their banks for both short-term and long-term loans. Likewise, bank overdraft is also a useful source of short-term finance. However, what entrepreneurs need to consider carefully is the interest rate charged by their banks.
Credit cards
Credit cards are often used by small businesses. Surely, it is a popular source of finance. All credit cards come with a standard interest-free period (HSBC, 2020). This helps entrepreneurs make purchases for a specific amount of time without any interest. However, it should be mentioned that credit cards may turn out to be costly if the balance is not paid off in due time.
Hire purchase (HP)
Hire purchase (also called instalment plan) is another source of finance. According to BBP Learning Media (2013) it is an agreement which refers to a form of borrowing whereby individuals or businesses purchase goods/services on credits and pay for them by instalments. This type of agreement is arranged by the vendor of the goods/services; however, is usually between the customer and a finance company.
Grants and government funding
Funding and grants from the government, charities and other social enterprises are immensely helpful for small businesses. Entrepreneurs can have access to hundreds to thousands of dollars for their businesses. They do not need to pay them back and there is no interest to pay either. And perhaps more importantly, they do not have to lose any equity to an investor.
We hope the article ‘Sources of finance for small businesses’ has been a helpful read.
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Last update: 06 September 2020
References:
BPP Learning Media (2020) Managing finance, 3rd edition, London: BPP Learning Media Ltd
HSBC (2020) What is an interest-free period?, available at: https://www.hsbc.co.uk/credit-cards/what-is-an-interest-free-period/ (accessed 05 September 2020)
Photo credit: Pixabay
M Rahman writes extensively online with an emphasis on business management, marketing, and tourism. He is a lecturer in Management and Marketing. He is a graduate of Leeds Metropolitan University and London South Bank University.