Business Finance Small Source
Why finance is required? Most of the people across the world think that there is no need for the small business enterprise to borrow money from others or the financial institution because the level of the business activity is small and the small businessperson can easily manage this amount. But this concept is altogether wrong.
A person should not forget that the small business enterprise has to undergo all the business processes through which any big small enterprise undergoes. Also, for the start up as well as the expansion or the diversification of any type of small business enterprise, the finance is inevitably required. You cannot imagine any small business enterprise to start or expand without finance. This is the reason why we find so many financial products available with the various financial institutions that provide the financial assistance to the small business enterprises. Let us see, what are the different sources from where a small business enterprise can obtain the finance.
Sources of finance for the small business enterprises:
There are many sources available from where a small business enterprise can easily obtain the finance. Since these enterprises or companies are not listed anywhere, in most of the cases, they have to rely upon the various financial institutions like the banks etc to get the finance. It has also been observed that in most of the cases, the small business is restricted to family members only and many a times, they push their money also in the business. Various sources from where the small business enterprise generally obtain finance are:
Overdraft Financing: This is of course the most common source from where a person can easily get the finance. In this type of finance, a small business enterprise is allowed to withdraw the funds excess of its limit in the current account or the business checking account. Thought there is interest payable on the exceeded amount, this facility is liked by many small business entrepreneurs to meet the temporary financial requirements. When they receive money from their parties etc, they deposit it back in the account. Also, this type of facility is quite easy to obtain as there are no hefty formalities and is available in no time.
Equity finance: Though most of the small business enterprise do no go for listing in various exchanges across the country, it has been seen that some of them having excellent tract record issues public offers for the listings. The main advantage of this type of financial sources is that this money has not to be repaid like in other type of credit facilities. But there are certain norms for the listing and these have to be fulfilled before a small business enterprise can go for listings.
Trade credit: This is a type of finance that is availed by almost all the small business enterprises. A trade credit is the credit that is allowed by the various suppliers of the small business enterprise where it makes purchases of raw materials etc without paying it on the spot and is given a time period to pay it. There is however no interest that is applied generally. The various norms and the guidelines that control the trade credit are normally self explained and it varies from one supplier to other supplier.
Factoring and invoicing discounting: There are many financial institutions and companies that provide the services of factoring and the invoicing discounting. In this type of method, such companies purchases the receivables of a small business enterprise and they pay them on the immediately. But there is some discount that is charged by such companies when the provide the finance. As far as its advantage to the small business enterprise is concerned, it is that it gets the amount immediately and also, no efforts have to be made for collecting the money from the various customers.
Merchant banking: This type of facility is quite restricted to a small business enterprise as it is generally provided to medium and large business enterprises.
Normal channels: This is by far the most important source of finance for the small business enterprises. It comprises all the credit facilities that are being provided by the many financial institutions. Among the prominent are the term loans that are provided for the purchase of machinery and other fixed assets, the working capital finance like the revolving credit that is provided for bridging the gap between the payments and the collections, and the other miscellaneous types of facilities like the bank guarantee, the letters of credit, and the lines of credit. The rate of interest that is being charged by the banks etc depends on many factors like the type of credit facility availed, the repayment period, the amount of security provided etc.
Thus, it can be easily said that there are many sources of finance that are available to the small business enterprises. Let us discuss some other aspects related to the small business finance.
Related aspects:
There are some related aspects of the small business funding that needs to be understood. First of all, the financial institutions like to provide the facility if some security has been provided by the small business enterprise. However, if no security has been provided, the financial institution relies greatly upon the past performance of the small business enterprise. This is the reason why a small business entrepreneur faces a problem when he wishes to start up his own small business enterprise. It is to be understood here that the different financial institutions charge different rate of interest on the various facilities they provide and thus, before going for any type of credit facility, a person should compare the rates of interest that is being charged. This is because the interest that a person pays on the loan is basically the cost of the loan. As far as trade credit is concerned, though there is no norm as such, a person should ask for any rate of interest that would be applied. As far as possible, a small business entrepreneur should try to meet all his business requirements by means of overdraft financing as it is quite easy to obtain.
So, There are many sources available to the small business enterprises:
If you wish to start up or expand your small business enterprise, there are many sources from which you can easily meet out your requirements of finance. Before going for any type of financial help, a person must contemplate about all the related aspects as discussed above.
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