Financing Your Business | Looking for Sources of Fund

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ll economic activities require the use of resources for a business establishment to engage in the production and selling activities, certain factors must be put in place such as land, machines, equipment, raw materials, labour, salaries, and fringe benefits. For all these to be made available, there must have to be finances to establish this business and continue operations, before it is in a position to generate resources from the sales of its products and /or services.

The optimal amount of funds to be employed in any business is not static. It is related to the size and level of operations of the business. Organizations in Nigeria are beginning to appreciate the need to have special reserves for some future projects depending on the policy management, while some firms may prefer to finance an expansion programme through savings; others may decide to depend on alternative sources. Funds can also be generated from provision for depreciation, but this depends on the size of the assets of the business and the depreciation policy of management.

The following are short-listed sources of fund by which funding a business can be made possible.

i.                   Internal Sources

a.                 Deferred taxes and other deferred payments

b.                 Special reserves

c.                  Provision for depreciation

d.                 Retained profits

ii.                 External Sources

a.                 Trade credit from suppliers

b.                 Loans from associate companies

c.                  Loans and overdrafts from commercial banks

d.                 Loans from small scale industries credit scheme

e.                  Bill of exchange

f.                   Promissory note

iii.              Long Term Finance

a.                 Equity

b.                 Lease financing

c.                  Long term debt financing

d.                 Sale of ordinary and preference shares

The amounts of funds that can be generated from retained earnings depend on the size of the profit, government incomes guidelines and the dividend policy of the company. The dividend policy of the firm plays an important role in the decision to retain earnings for further investments.

Trade credit from suppliers is one of the main sources of short-term finance to business enterprises. Most suppliers of raw material attempt to increase their sales by extending trade credit to their customers. Goods are delivered or services rendered, and the customer is given some definite time to pay for the goods or services. To encourage payment of bills, suppliers allow some discount of say 5% to customers who pay on /or before the due date. As with commercial banks, suppliers extend credit to business enterprises that are judged to be credit worthy firms. It is a practice for banks to provide confidential information on the credit worthiness of a business enterprise. The credit history of the business enterprise can also be gotten from the suppliers own experience of other firms. This will form the yardstick that will determine whether the firm should be granted the credit or not.

It is pertinent to state that banks are a major source of short term loans and overdrafts, the commercial bank is the principal source of short-term finance for a business. The method by which commercial banks provide short-term funds is to open an advance request, a line of credit or overdraft facilities for the customer. By this process, the commercial bank agrees to accommodate the request for cash loans, up to a certain amount. Overdraft facilities enable the business enterprise to use funds in excess of its cash balance in the bank to pay its suppliers or staff salaries, or to meet other operating expenses. Interest is paid on the overdraft facilities used. For an overdraft loan be granted, certain requirements like security or collateral, the bank will also determine the soundness, profitability and viability of the project, as well as the borrower’s managerial competence and technical skills in executing the project must be met by the business.

It is common facts that most incorporated and small scale business depend almost entirely on the savings of their owners for long term finance. However, in Nigeria, only a limited fund can be generated from this source. The proprietor’s saving may be supported with loans obtained from friends or relations.

An organization can raise a long-term loan by issuing bonds, a bond is a certificate of indebtedness, it attracts a fixed interest rate which must be paid, whether the company makes a profit or not. The principal must be fully repaid at a specified future date. Bonds may either be secured or unsecured. A bond may be secured by mortgage or pledging the assets of the company to the bond holder. If the company is unable to repay the principal when it matures or when the company goes into liquidation, the bond holder may recover his money by selling the mortgaged asset bond.

Any product or service can be your catalyst to wealth if you stop thinking you need someone to give you a break, you can increase your capacity to receive more income by changing your relationship with money.

See you to your way of great achievements in your business…