Business Financing: 5 Ways to Finance a New Business

Business Financing: 5 Ways to Finance a New Business

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For a business to grow and reach its full potential, proper financing is very important.

There are many ways of financing a business. Here are 5 different ways:

1. Equity finance

In small companies, this includes personal savings or simply the funds that are contributed by the owners of the company. In large companies however, equity finance composes of ordinary share capital (OSK) and reserves. Equity finance can be further classified into (OSK) or the ordinary share capital, retained earnings and the Quasi-capital.

2. Debt finance

Debt finance can be described as being a type of finance which is fixed in terms of its returns since the interest charged on the basic amount is consistent and constant. It is preferable to use when there’s a good equity base in the company. Normally, this type of finance is limited and it is usually raised from specific companies that meet the required conditions.

The most common type of debt finance is Loan finance:

Loan finance – this is a type of loan finance. The terms of availability varies from short term to long term.

The terms are not constant but relative depending on different borrowers. When going into long term ventures, it is advisable to use short term loans. Likewise, long term loans are more applicable in long term ventures.

3. Lease Finance

Leasing can be defined as a contract usually between two parties: one of the parties being the lessor (asset owner) and the other being the lessee in which case the lessee acquires the right to responsibly use the asset on condition that he/she pays the lessor the rental charges due during the lease period since the asset leased generates economic gains. Lease finance can be used both in the long term and in the short term depending on the financing plan of the business.

4. Overdraft Finance

When a company or a firm is experiencing liquidity problems especially of a short term nature, overdraft finance is the best business financing option to use. In most cases it is a secured finance unless otherwise stipulated. It is however expensive compared to other sources.

5. Venture Capital

This is a form of investment usually in new, small, and risky enterprises that is required to get them on their feet. The whole process of using this type of finance is done by venture specialists. What happens is that the venture capitalists buys a portion of a company’s stock when that goes into the public domain. Once the prices of the shares rises, the venture capitalists sells the shares to make a profit.

As the company owner searching for a way to finance your business, it is important to understand that the main aim or goal of venture capitalists is to make a profit. The venture capitalist therefore will only provide your business with the relevant financing only when they are sure that once they invest in the business, it will exponentially grow into a success and they will eventually make a profit.

As a business owner, there are many ways to finance your business. It is therefore important as a business owner or as an entrepreneur to closely evaluate the potential sources of finance depending on your financial position so as the final choice enhances your business growth and success.

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Categories: Business Financing

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