Sources of Finance for a Business
Sources of Finance for a Business. It includes the dynamics of assets and liabilities over time under conditions of different degrees of uncertainty and risk. For any businesses be it start-ups or established one, there are internal and external sources.
A. Internal sources
1. Personal sources:
These are the most important sources of finance especially for a start-up business. When someone opens a new business it is more likely he/she needs to invest from his/her own pocket at first before trying to raise money from other sources .Most of the time family members contribute capital for the startup entrepreneurs.
It is the net income of a business minus any dividend paid to the shareholders. Usually small business grows investing back the retained earnings. This is the common way for small firm to grow.
B. External sources
1.A bank loan:
A bank loan is a long term financing for a business usually bank will require providing some security for the loan. Normally bank is used for purchasing the fixed assets and that asset could be put as security to the bank.
2.A bank overdraft:
A bank overdraft is a kind of bank loan but for the short-term bank may approve a business as certain amount of loan facility and when the bank balance of the business goes below zero then it can use the loan in return for paying a high rate of interest.
A firm ma issue some bonds for financing a capital purchase for long term financing. Usually business would require paying a coupon payment periodically along with the principal amount.
4.Share Capital (IPO):
An established business may want to issue IPOs to raise capital for the expansion of existing business or to pay off the long term dept. instrument.