Every business requires resources to run its operations and acquire assets and other factors of production necessary for its smooth running. There are various sources of obtaining these funds, which include, among others, bank borrowings, retained earnings, leasing, hire purchase and government funding.
Bank lending is a common source of finances for businesses, (Berger and Black, 2011). Banks offer short to medium term lending, with short term being up to three years and medium term being from three to ten years. Short term financing is either in the form of overdraft or a short term loan. Overdrafts have limits set by the bank, and the company can only overdraw amounts within the set limits. A variable interest rate is charged on the amount overdrawn on a day to day basis. Interest rates can either be fixed or variable, which requires being adjusted quarterly, depending on the current Base Lending Rate. Loans and overdrafts can be used to purchase assets in the company, as well as support the running operations.
Retained earnings are another source of funding. A company may decide to re-invest the profits earned, to finance new projects or acquire assets. Retained earnings do not incur the company much cost as compared to other forms of financing, and as such is preferred. This method allows new projects to be undertaken without the involvement of external parties or the shareholders. It is, therefore, an excellent source of finance for business expansion.
Leasing is a common method of acquiring property, especially for start-up ventures, (Storey and Greene, 2010). It is an agreement between two parties; the owner of the asset, commonly known as the lessor, and the lessee, who is in need of the estate. The lessor allows the lessee to make use of the asset for the specified period of the agreement, and the lessee makes payments under the terms of the lease. Leasing does not transfer ownership of the asset to the lessee, but only gives the permission of use. The commonly leased assets are buildings, machinery, and vehicles. Leasing is a cheaper way of acquiring property for use in the short run but can be costly and uneconomical in the long run.
Hire purchase is another method of business financing. It is a form of installment credit whereby an asset is bought on credit and payments made in installments. The buyer can use the asset before it is fully paid, but only acquires ownership after the final payment is cleared. This form of financing is advantageous as it allows other operations to be carried out concurrently with the purchase of the item. Unlike leasing, the asset ends up being owned by the company at the end of the payment period. Hire purchase is therefore recommended for businesses that are carrying out multiple investment projects, ventures undergoing low financial inflow, as well as start-up enterprises.
Government funding is common in many countries. In a bid to grow the economy of the country, governments have policies that support companies funding through cash grants and loans as cited by Kolk, Van Tulder and Kostwinder, (2008). These are government efforts in areas especially hit by unemployment and in high technology industries. When the companies grow, the national economy develops.
In conclusion, there are various methods of acquiring financial capital for business, ranging from loans, returned earnings, leasing, hire purchase and government assistance. All these and others can be adopted by any enterprise.
Berger, A. N., & Black, L. K. (2011). Bank size, lending technologies, and small business finance. Journal of Banking & Finance, 35(3), 724-735.
Kolk, A., Van Tulder, R., & Kostwinder, E. (2008). Business and partnerships for development. European Management Journal, 26(4), 262-273.
Storey, D. J., & Greene, F. J. (2010). Small business and entrepreneurship. Financial Times/Prentice Hall.
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