Sources of finance available for a business

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Table of Contents
1.

Introduction .........................................................................................................................3

2.

Sources of finance: detail description ...................................................................................3

I.

Owners Investment: Equity Capital .................................................................................3

II. Bank Loan: Debt Capital ..................................................................................................4

III. Share Issue: Equity Capital ...............................................................................................4
IV. Sale of Fixed Asset: Equity Capital ..................................................................................5
V. Debt Collection: Debt Capital ...........................................................................................5
VI. Angel Investor: Equity Capital .........................................................................................5
VII. Venture Capitalist: Equity Capital ....................................................................................6
VIII. Crowd Funding: Equity/Debt Capital ..............................................................................6
3.

Conclusion ...........................................................................................................................7

4.

Reference .............................................................................................................................8

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1. Introduction
One of the biggest challenges for an entrepreneur while starting new business venture or
escalating the existing size is identifying a proper source of finance which will ensure the
ultimate goal- wealth maximization. The everyday swells and troughs in the loan-able fund in the
capital market

make the capital search more challenging like riding a wild roller coaster

(Brigham and Houston, 2004). Banks reluctance to give loan for less glamorous industry or
startup Venture, angel and venture capitalist keenness to established firm are some factors that
manipulate the sources as well.

2. Sources of finance: detail description

Different sources of finance are described below considering the cost, time and internal or
external source-

I.

Owners Investment: Equity Capital

This type of funding comes from owners personal source or savings. Profit from the business
operation can be the source of owners investment. This fund is considered as initial funding if
its a startup venture or it will be known as additional capital in case of expansion (Crundwell,
2008).

Criteria

Description

Duration

Long term

Types of finance

Internal source of finance

Cost

1. No need to repay
2. No interest cost
3. No associated cost
4. No security requirement

Suitable for

All types of business- sole, partner, private or

public

Table 1: judging owners investment as a source of finance. (Own analysis)

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II.

Bank Loan: Debt Capital

Borrowed capital is one of the most common types of source of financing. It is generally
collected from bank based on an agreed interest rate and a specific time period. It increase the
leverage of the firm (De Boer et al., 2007).

Criteria

Description

Duration

Generally Medium and Long term

Types of finance

External source of finance

1. Need to pay an agreed interest cost

Cost

2. Required to pay principle

3. Strict security requirement
Suitable for

All types of business- sole, partner, private or

public
Got tax benefit for interest payment

others

Table 2: judging Bank loan as a source of finance. (Own analysis)

III.

Share Issue: Equity Capital

The size of capital that is collected from mass people through issuing share in the capital market
is known as share capital (Dube, 2007). Those who buys the share is regarded as shareholder
thus owner of the company and hold the liability equivalent to their amount of share.
Criteria

Description

Duration

Long term

Types of finance

external source of finance

Cost

I.
II.
III.

Suitable for

No Need to repay as they are owner

No interest payment
No security requirement

Only the public limited company

Table 3: judging Share issue as a source of finance. (Own analysis)

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IV.

Sale of Fixed Asset: Equity Capital

By selling the fixed asset that is no longer needed, a business can collect required fund. But
alarming news is- the business does not always hold an unnecessary fixed asset. For a startup
venture this types of source is not applicable.
Criteria

Description

Duration

Medium term

Types of finance

Internal source of finance

1. Transaction cost can be applicable

Cost
Suitable for

All types of business- sole, partner, private or

public (Bhowmik and Saha, 2013)

Table 4: judging Sale of fixed asset as a source of finance. (Own analysis)

V.

Debt Collection: Debt Capital

Collecting loan from friends and family is an excellent source of seed capital. They are generally
known as debtor. For an startup firm this the second most favorable source of finance after angel
investor (Rioja and Valev, 2004).
Criteria

Description

Duration

Long term

Types of finance

Internal source of finance

1. Need to repay

Cost

2. Pay an annual interest

3. Generally no security requirement.
Suitable for

Very favorable for- sole and partnership business.

Table 5: judging Debt collection as a source of finance. (Own analysis)

VI.

Angel Investor: Equity Capital

There are some kinds of giant investor around who have a lot of cash to invest. Angel investor
generally searches for innovative and extraordinary entrepreneurs who have innovative business
idea but in need of fund (Bhowmik and Saha, 2013). They are known as owner of the business.

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Criteria

Description

Duration

Long term

Types of finance

External source of finance

1. No Need to repay

Cost

2. No interest cost
3. Generally no security requirement.
Suitable for

Have a good prospect for new startup, can be sole

or partnership business.

Table 6: judging Angel investor as a source of finance. (Own analysis)

VII.

Venture Capitalist: Equity Capital

Venture capitalist are generally for profit organization who collect fund from various source and
then use the fund to purchase major share of a new profitable and high growth potential startup
business.
Criteria

Description

Duration

Long term

Types of finance

External source of finance

1. No repayment requirement

Cost

2. No interest cost
Suitable for

Have a good prospect for young potential business,

can be in form of sole or partnership (Rioja and
Valev, 2004).

Table 7: judging Venture capitalist as a source of finance. (Own analysis)

VIII.

Crowd Funding: Equity/Debt Capital

This is the most recent internet based capital collection system. Under crowed funding, generally
a startup summit the plan by opening an account under fund raising website such gofundme.com,
then mass public analyze the business plan and if impressed they give some money in the
account. Crowed funding can be 2 types- equity funding or debt funding

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Criteria

Description

Duration

Long term

Types of finance

external source of finance

Cost

1. No repayment or interest cost requirement

for equity funding
2. For debt funding both repayment and
interest is applicable.

Suitable for

Solely for a startup, can be in form of sole,

partnership or limited.

Table 8: judging Crowd Funding as a source of finance. (Own analysis)

3. Conclusion
Without an adequate amount of Capital it is impossible to think of business prospect. Any form
of asset like cash, equipment, inventory or plant can be the capital which can be employed to
extract more value for the business. How much capital does the business need and what purpose
it will serve are two more venerable & sensible questions need to be answered when we search
for fund. After all choosing a cost effective source can lead a business in to reach its ultimate
goal.

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4. Reference
Bhowmik, S. and Saha, D. (2013). Sources of Finance. Springer, pp.61--71.
Brigham, E. and Houston, J. (2004). Fundamentals of financial management. 1st ed. Mason,
Ohio: Thomson/South-Western.
Crundwell, F. (2008). Sources of Finance. Finance for Engineers: Evaluation and Funding of
Capital Projects, pp.507--529.
De Boer, P., Brouwers, M. and Koetzier, W. (2007). Basics of financial management. 1st ed.
Netherlands: Wolters-Noordhoff Groningen/ Houten.
Dube, M. (2007). Challenges facing the financila management of small, medium and micro
enterprises in Botswana. 1st ed.
Gofundme.com, (2014). GoFundMe: #1 for Crowdfunding & Fundraising Websites. [online]
Available at: http://www.gofundme.com/ [Accessed 26 Apr. 2014].
Johnson, R. (1971). Financial management. 1st ed. Boston: Allyn and Bacon.
Ladley, B. and Wilford, J. (1980). Money & finance. 1st ed. New York, N.Y.: Neal-Schuman
Publishers.
Newlyn, W. (1968). Finance for development. 1st ed. [Nairobi]: East African Pub. House.
Rioja, F. and Valev, N. (2004). Finance and the sources of growth at various stages of economic
development. Economic Inquiry, 42(1), pp.127--140.
Woodhall, G. and Stuttard, A. (1999). Financial management. 1st ed. Houndmills, Basingstoke,
Hampshire: Macmillan.

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