By Stephen Quarshie
Every business would be funded in some way. It could be from internal or external sources. Funding is necessary for a new business or an old one trying to expand its cooperation. The challenge faced by most business is choosing the right source of finance. This is dependent on the unique situation faced by the business entity. There are so many options but each source of finance with its own set of advantages and challenges. The choice of funds depends on certain criteria such as cost, duration and terms and accessibility.
Personal Savings and Assets
One of the major sources of finance for a business is personal savings and the use of other assets. Personal savings is a necessity for start-ups. It is difficult to access external funds without evidence of committed personal funds. Personal savings do not physically cost the owner because the money is his. On the flip side one could lose all the personal savings ploughed into a business venture. Other assets such as vehicle, equipment and furniture could also be used in setting up a business. There are other resource such as retirement benefits which could be used in establishing a business.
Investor form a core group for sourcing finance. Investors may be active or passive. They are usually called shareholders or equity holders. The active shareholders may seek representation on the board of directors and participate in managing the affairs of the business. Investor group can help raise capital for start-ups or business growth or expansion. The business in such instance must make sense and provide adequate returns. The involvement of investors in any business setup reduces the control exercise by the promoters. Investors bring in additional capital and know-how but also demands strict accountability. Shareholders share the risk as well as the return on investment of the business.
This is the cash that is generated by the business when it trades profitably. It is another important source of finance for any business, large or small. Retained profits are used for recapitalization and grow the business. It is synonymous with personal savings and does not cost the business entity.
Bank loans are very good source of funding giving the roles that banks play in financial intermediation. Small business may be able to secure loans to support their operational activities. Banks also offer facilities to business for working capital and acquisition of non-current assets such as land and building. Bank loan are used to, promote business growth and expansion. Bank loans are not free. Unlike personal savings, they attract interest on the loan. The interest rate may vary due to economic and other default charges. Some interest charges could be disincentive to business finance.
Government Grants and Loans
The Ghana government has several programmes and facilities to help small and medium enterprises and companies to grow and expand their businesses. Grants are basically free financial support. Government guaranteed loans or facilities come with interest rate that is basically far below the existing market rates. They usually come with certain specific and focused agenda to address some public interest issues such as skills development. They may not be available for every type of business. Government guaranteed loan is still a loan and may exact similar terms and conditions as per any other commercial loans.
Some of the funds under the following schemes; Youth Enterprise Support (YES), Microfinance and Small Loan Centre (MASLOC), Export Development and Agricultural Investment Fund (EDAIF) and Venture Capital Fund. The motivation for the establishment of these schemes has been to increase the flow of finance and credit to SMEs in other to assist them to increase their operational capacities, increase productivity and increase entrepreneurship.
Business angels are professional investors who typical invest their funds in a start-up company. They prefer to invest in business with high growth prospects. In addition to their money, Business Angels often make their own skills, experience and contacts available to the company. Getting the support of a Business Angel can be a significant advantage to a start-up.
This is a specific kind of share investment that is made by funds managed by professional investors. Venture capitalists rarely invest in the start-ups or small businesses. They prefer to invest in businesses which have already established themselves. Another term which is usually used for Venture capitalist is ‘private equity’. A start-up is much more likely to receive investment from a business angel than a venture capitalist. – The Spectator