Raising finance
Finance is the most important aspect in a business, whether it involves the growth of the business or whether it is regarding issues of raising finance for a new project or about the payments, which will be incurred during the ups and downs of the business. Finance is the sector, which many new businessmen fail to understand. Raising of finances is the most important task as many projects fail due to improper management of finances.When a company goes through a stage of rapid growth, many times, the finances which are being used currently can become inadequate to the requirement at that point. Very few companies can finance their expansion plans with the help of the available cash flow. So many of them consider raising finance from an external source.
There are a number of finances available to meet the need of the growing businessmen.
Venture capitalMerchant banks
Clearing banks
Existing share holders and directors funds
Hire purchase and leasing
Factoring and invoice discounting
Business angels
Family and friends The important point is of choosing a source of business finance, it can be done by striking a balance between equity and debt and to make sure that the funding structure suits the business plans. There is a difference between the money that is borrowed and the equity is that the bankers make a demand for capital repayments and interest payments. The money, which is borrowed, is secured on business assets or the personal assets of the shareholders or the directors. The banks have a complete right to put the business in the bankruptcy norms, if the borrowers fail to make payments or the prospects of the borrower declines. On the other side, the equity investors take risk like the other share holders; they enjoy at the time of profit and suffer at the time of loss. The venture capitalist also needs to make a few complex investments like preference shares or loan stocks; these are in addition to the equity stakes.
Overview
The kind of finance to be given depends on the idea of the business, the stage it is in, the reward and risk characteristics connected with it, this helps in deciding on the source of the finance to incur. This information will help the organization in making a secured funding available. The business and the financial plan should be drawn and must be updated before approaching any lender. The finances, which are made available can be divided into three types: short term finances, medium term finances and long term loans. The short term finances are known as working capital and are required for the daily funding of the business.
Bank overdraft, trade credit, debtor finance, commercial bills are some of the examples of this type of finance. Medium term finances are required for purchase of equipments, development of new products and business expansion. Term loans, leasing and personal loans are the best examples for medium term loans. Long term loans are a kind of finance, which is used to fund the purchase of assets, like the land required, a plant or machinery, buildings or business itself. This indirectly brings profit even though the time span is long.
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