Introduction
A business requires finance in the form of working capital for its commencement so that it can develop better and newer ideas. This is applicable for a new and small enterprise as it lacks any goodwill as capital to start with. As it begins to grow the business starts to diversify into different products which require new technology along with higher capacity which can be relatively expensive. Further, in today’s competitive market, a business needs finances for marketing their products and market research. Businesses also require finances for entering new markets for its expansion and during acquisitions and take over. (Holmes 2007)
Finance is also necessary when a business moves to new premises, for reallocating the employees and to install machinery. Sometimes plants too need to be purchased or replaced and existing partners need to be bought. Apart from these reasons, businesses require finances for unforeseen expenses like natural calamities, terrorist attacks and the departure of important employees. Thus, for a small enterprise, it becomes essential to harvest every probable financial resource possible. (Bougheas 2004) Let us assume ABC Company is a small enterprise and they are evaluating all the potential finance available in the market.
Source of funds
- Peer-to-peer networks ─ The organisation has tapped into several peer-to-peer lending networks where the amount of money required can be listed along with details about our organization and business and why we require the loan. Then it is up to the individual lenders to decide whether to sanction the fund or not. Peer-to-peer loans have been chosen as a source of funds by the company because they offer certain other benefits like competitive rates and fast delivery of the funds. Further, the peer-to-peer lending sites are somewhat like credit cards and thus, due to this borrowing become very easy. (Spiros 2004)
- Microlenders ─ Microloans or microcredits are smaller loans and microlenders are not-for-profits organizations. The reason for choosing microlenders is because they rely on the donations given by individuals and charitable organizations and are thus, more than willing to lend money to organizations like mine with checker credit history. Although microloans have a higher interest rate that varies between 13% and 8%, they are often subsidized by various local, federal and state grants. They are extremely flexible but sometimes take a little too long in evaluating the business. (Douglas 2000)
- Asset-based lenders ─ Asset-based loans have been taken by the company for a shorter time by securing its assets like inventory, real estate and accounts receivables. However, here if the company is not able to repay the loan being taken the asset will be seized. We can compare asset-based lending to subprime lending since it comes with a very high-interest rate. The reason for choosing such an alternative is because it allows the organization to bridge itself over the time between the cash flow of payments is received and the expenses.
- Term Loans ─ Although the company has taken the term loan from the bank, they are different from overdrafts and business loans. Here the owner of the company will have to give the bank personal guarantees and will also be charged against their physical assets for security. The reason The Company has opted for such an option is that term loans make it easy to buy specific assets like computers and other machinery having a mid-term or long-term expectancy. Another advantage of term loans is that the interests can be rather floating or fixed and the payments can either be made quarterly or monthly depending on the term offered by the bank and the nature of our assets. (Hartness 2001)
Type of finances
- Personal loan ─ It is also known as a signature loan and is usually given as a means of debt consolation. It is granted for personal, family and household use instead of commercial or business use. It is either secured on unsecured through an asset purchased or the guarantor. It is usually repaid by fixed amount instalments given over a fixed period. (Johnson 2005)
- Hire purchase ─ It is a legal term denoting a contract and referring to employment where the comparable system is known as closed-end leasing. When a buyer is unable to afford the price of a property item in a lump sum, then through a hire purchase contract he can hire the good on a monthly rent by paying a percentage for a deposit. When the actual sum has been paid along with the interest in equal instalments it is up to the buyer to either buy the good at the predetermined rate or return it to its owner.
- Leasing ─ Through the process of leasing a firm obtains the usage of a particular fixed asset by paying a chain of tax-deductible, contractual and periodic payments. The receiver of any asset or service is the lessee and its owner is the lessor. The lessor can do anything he wants with his asset but after he has surrendered his possession to another, he cannot interfere with the asset. (Smith 2006)
- Sale-and-leaseback ─ More commonly known as leaseback, it can be described as a monetary transaction where an asset is sold and leased back for a longer time. Thus the business or individual still uses the asset but does not own it. This is done to free the owner’s capital while at the same time allowing him to retain use and possession of that asset, mainly fixed assets like real estate. Leaseback is a highly beneficial tool since it is simple and generates high returns for both loaner and borrower.
- Bridging finance ─ This type of financing is used for maintaining liquidity whilst having to wait for a reasonably expected and anticipated flow of cash. It is normally used when an inflow of cash obtained by selling an asset is awaited after a cash outlay on the purchase of the asset. Sometimes organizations also use bridge financing before the initial phase of their public offering. Bridge financing is of two types ─ open bridging and closed bridging. (Fetter 2007)
- Commercial bills ─ It is a non-bank loan or bill of exchange that has been generated by investment banks or merchants and organizations. The bill serves as evidence of the debt taken by the borrower and commits to repaying it as per the due date. They are normally associated with high-end business lending and investment lending. This type of finance is normally rolled over till a borrower can repay the entire loan. (Jones 2007)
- Debtor factoring or invoice discounting ─ Invoice discounting considers only the outstanding invoices and debts owned to the business rather than the balance sheet. Although it is a highly quick and flexible means of acquiring finances, it is a little more expensive than normal bank lending. However, it is advantageous because unlike bank lending factoring places more emphasis on the value of our receivables rather than on the creditworthiness of our business. (Fetter 2007)
- Floor plans ─ It is a kind of asset-based financing mainly used for funding the inventories of a business. Mainly vehicles are financed through this type of financing. Here the lender enters some form of credit agreement that is revolving with the dealer and finances the purchase of the vehicle, the lenders take a security interest on the money that has been lent. After the vehicle has been sold, the loan advance must be paid to the lender.
- Mortgagees ─ The lenders or mortgagees use mortgages as a means of security against the money that has been borrowed by the borrower or mortgager concerning some property. For example, a bank can become a mortgagee after it accepts a mortgage from the borrower on any of its properties. (Green 2006)
Sources of finance
- Trading banks ─ A trading denotes a commercial bank. It accepts deposits and gives business loans along with other related services. They allow a number of deposit accounts, like a time deposit, checking and savings. They are generally owned by a number of people who want to make a profit and are mainly concerned with loaning to businesses and receiving deposits. They raise funds through the collection of deposits from current and savings accounts and also have term deposits or FDs. They offer corporate and consumer secured loans, unsecured loans and mortgage loans. (Beaver 2007)
- Finance companies ─ Finance companies are the ones that lend money to other businesses in the form of loans. It typically acts as a bank since it gives loans to businesses by extending credit. But unlike a typical bank, a finance company does not take any deposits from the borrower. Instead, it draws funds from money market resources and various banks. Credit can be extended by these finance companies to organizations for their commercial use. Certain financial companies also specialize in offering finances for instalment plan sales and may also be associated with other holding companies or firms. (Douglas 2000)
- Venture capitalists ─ High-risk investors are the venture capitalists who invest in only those businesses which fit a certain investment criterion having a high reward ratio. They are actively involved in the company’s management providing them with a lot of financial, strategic and optional advice. They are advantageous because they can introduce the organizations to a network of extensive strategic partners both on the international and domestic levels. They have also helped identify the probable acquisition targets for organizations and have even facilitated the entire acquisition.
- Credit unions, private lenders and community banks ─ These alternate sources of funds have proved to be extremely useful for organizations since they have been able to dodge the impact that had been created by the mortgage bullet. Another reason for choosing them is that they have issued several additional loans for an organization as the outlook till the present lending environment shows an improvement. Also, private lenders and credit unions rely more on the company’s track record and business model rather than the overall credit score. (Hartness 2001)
- Insurance companies ─ These are companies that offer public insurance policies and either directly sell them to them or provide them with other sources like benefit plans. Insurance companies normally consist of multiple insurance agents and can either specialize in a certain form of insurance like auto insurance, life insurance or health insurance or deal with many forms of insurances. (Smith 2006)
Discussion
Private firms, in maintaining their reputations, are a lot easier to handle if something like this happens. Financial groups also generally have the assets required to pay back anything that happens and will often not mark identity theft on your credit score. It is much easier to find somebody more amiable to speak with face to face since financial groups also have better office hours than banks do. Many even have prepared offices to specifically handle identity theft. (Hugo 2008) This way, they are prepared ahead of time and can make the whole process that much quicker.
All in all, although banks have been the most popular method of economic growth, they are quickly becoming one of the least reliable sources. Private enterprise is taking a new face in the modern world and is helping to facilitate strong economic growth, even during a time of recession. In this modern-day and age, businesses are becoming more personal, which most people enjoy. (Bozicnik 2009) This gives people a larger sense of trust with companies and allows them to get more loans.
When people have more money, they spend more and put more back into the economy. It is fairly plain to see why market-based financial systems the superior method of economic growth are. Whenever you de-regulate how business is run, people tend to show the good side of them more and help each other out more. Laissez-faire is an important cornerstone in today’s free world market, and it should stay that way. Banks are still regulated by the government and have been failing to keep up to par. The choice is obvious and hopefully, the government begins to support private financial groups more in the future. (Hoetker 2009)
Conclusion
Like many other companies, small enterprises like ABC Company has also had to look for alternate sources of funds and financing options after having to face dire financial needs. While the above options have been suitable for the Company it may not be so for the other companies since an alternative source of finance or funds should meet our particular business needs. These alternatives may require a steeper price but have certainly proved useful and better than having to rely on some high-interest loan shark or credit card.
Bibliography
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