Introduction
Funds are required for the survival and growth of a business enterprise. In order to start up or expand an existing business investment, there is the need to raise the needed funds. This form of cash is usually referred to as business finance. These finances are obtained from a number of sources including internal sources such as savings, and other external sources like bank loans. Decisions on how to manage these finances are critical at this point as there are a lot of implications related to each of these sources. These implications include legal, financial & dilution of control, and bankruptcy.
This paper seeks to identify the various sources of business finance for small- and large-scale businesses. The discussion also involves the assessment of the legal, financial, and dilution of control implications, and bankruptcy underlying these sources. Finally, the paper will cover a case study in which it provides the most appropriate sources of financing for the construction of a highway in Sudan.
Managing financial resources of Decisions
Sources of Business Finance
Sources of business finances can be divided into three categories and they include short-term financing, intermediate financing, and long-term financing (Medina, 1988). The short-term/intermediate sources of finance include leasing, bank overdrafts, trade credits, bank loans, and credit cards, among others. On the other hand, the long-term sources of finance include; government, local authorities & grants, internal capital, retained profits, venture capital, bank loans, debentures, asset sales, and share capital (FAO Corporate Document Repository n.d.).
Assessing the implications of sources of business finance
Legal implications of business finance
In any business, financial statements provide a highlight of the financial strength of the enterprise. An audit of the financial statement is important in order to allow for investments, financing, and taxing. According to How to Finance your Start-up (n.d.), laws governing auditing vary from country to country and they have to be adhered to in order to avoid any legal implications. Financial statements are required during the applications for personal or financial aid from a bank or any other external source of finance. This is especially the case with long-term financing. In order to gain the confidence of any source of finance, the financial statement has to be reliable, relevant, and understandable. It should also provide for reporting of the business assets, liabilities, equity, income, and expenses. Most potential investors, therefore, find these statements quite useful while assessing the viability of the business in which they wish to make an investment (How to Finance your Startup n.d.).
Financial & Dilution of control implications of the sources of business finance
The financial implications of the sources of business finance involve the value of the source to the business in terms of expanding the financial base. On the other hand, dilution of control of a source of the business finance entails the power of that source in reducing the owners’ control over the business’ shares. The short-term/intermediate sources of business finance are easier to obtain and the risk involved in lending funds is also lower. Consequently, these sources have no dilution of control and have a low financial risk owing to their flexibility. Borrowers do not, therefore, need to stick with the terms of the creditors after the debt has been settled. These sources are equally less costly since they are usually granted by creditors at lower costs.
Unlike the short-term sources, long-term sources of business finance have a much higher financial risk and dilution of control over the business shares and ownership. Creditors have to evaluate the safety of their money and also ensure that their return on investment is almost guaranteed. This is unlike venture capitalists that are willing to risk their investments. The long-term sources of business finance are costly in the long run as the interests accumulate and vary according to the length of the payment period just in case the business does not pick up as planned. Finally, these sources of business finance do not offer borrowers any flexibility even after they have settled their debts. Long-term financing does not offer the borrowers the option of using other sources of credit after settling their debts and thus they have to stick to the terms of creditors for a longer period of time (Medina 1988).
Bankruptcy
This is the position that a business owner experiences upon failing to settle a debt. When the revenue of a business is unable to support the normal activities of the business (for example, paying employees, ordering new stocks, and failing to pay creditors in due time), the business may face legal implications which may result in bankruptcy. Short-term financing offers the business owner a lower risk of going into bankruptcy since it offers the business owner the flexibility required to seek funding from other sources. On the other hand, long-term financing involves a higher risk of bankruptcy since the business owner cannot go against the terms agreed upon during borrowing.
Case study: sources of finance for construction of a highway in Sudan
The most appropriate sources of finance for the construction of a highway should be the Government and the local governments and grants. The central and local governments raise revenues from motor vehicle fuels and taxes and highway user charges which can be employed in constructing highways. Since this is a long-term investment, it requires reliable long-term financing sources which offer a longer period of repayment. Loans and grants can also be useful in financing this project since their terms can allow for repayment over an extended period of time considering the fact that the revenues are unpredictable and depend on the goodwill of the highway users and the relevant governments (Williams & Howard, 1994).
Conclusion
The essay offers an elaborate discussion on the various sources of business finance available to those investors aspiring to expand or start up business enterprises. The paper explores the various legal, financial, and dilution of control and cases of bankruptcy associated with these sources of business finance. The case study given in this paper gives a discussion of the most appropriate sources of financing the construction of highways considering their unpredictable revenue sources. It is justifiable to take the implication of a financial source into consideration before employing that particular source in order to avoid negative results from an investment.
Reference List
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