Question remains, how can i source my business funds to finance my business ideas? There are two main sources of business finance, the choice depends on the entrepreneur's purpose of finance, type of needed (short-term finance, medium or long-term finance) and who will provide the finance. Finance can be sourced under two major sources: internal sources and external sources
This is a way of sourcing for a business finance from the funds of the entrepreneur himself or his already existing business. That is from your personal savings, relying on the past profit made by your business or from an inherited fund.
- Financing business through your savings: saving is a habit of setting aside some percentage of an individual income for future needs. This can be done by opening a savings account in a bank or through opening a capital contribution account in non-banking institutions like insurance company with a target of building the money to a certain level at a chosen time period before it will be invested.
- Financing business with the past business profit: this type of financing can also be called re-investment. The profit made in the business is invested back into the business.
- Financing with an inherited fund: people who use this type of financing are very few in number because not everyone is opportune to have their loved ones leave something behind for them. This type of funding is from a free source being that the individual may not work for it but feeding on another person's hard work passed to him/her.
This is a type of finance received by going somewhere to borrow your business fund. These means can be:
- Borrowing from friends and relations: this type of business finance is mostly informal in nature whereby the entrepreneur sources his finance from his close pals. This means of raising fund is not effective due to its informal nature. The lenders in this category at times, withdraw from lending with fear of not being paid back in the future which can cause friction in the relationship.
- Borrowing through the banking institutions: this is another means of finance a business idea by sourcing for a fund through commercial bank. This form of loan is usually a short term whereby some percentage will be charged as interest. Interest is a cost paid by a borrower to the lender on the capital he borrowed. When contracting for any loan, the entrepreneur should endeavor to check for the terms and conditions of the credit even the stipulated interest should be considered (whether higher or lower) before applying for the loan. To avoid falling into a debt problem, an entrepreneur should ensure he work out a proper achievable business plans on how to utilize the fund (a budget) in order to be able to pay back the fund and the interest at the stipulated time. Again, you can make use of overdraft. Overdrafts are kind of lending by banks to their customers, which involves their customers withdrawing an amount which is in excess of the sum standing to the credit of their account with an interest to be paid later.
- Through customers or clients by issuing them a trade credit. This involves the act of selling goods on credit to credit worthy customers. An entrepreneur who has a running business and in need of a short-term finance can arrange for a credit by placing an order with one of his suppliers. If the supplier is satisfied with the conditions of the credit, the goods will be sent and payment will later be made. Here the seller may offer a form of discount to the buyer.
- Borrowing through non-banking institutions: there are other financial institutions apart from commercial banks who engage in credit lending services like insurance companies, mortgage houses, leasing companies and so on. You can also obtain a mortgage loan which make s use of housing structure as a collateral for sourcing a long term fund. The long term nature of this type of financing makes it easier for the borrower to pay back his loan in installment with less burden but he is at the risk of loosing his house if loan is not paid.
- Through other long-term sources which includes equity capital, loan and debentures stock and preference capital. This is mostly used by entrepreneurs in big enterprises.