Small Business Finance

Small Business Finance refers to the task of providing funds or capital required for the starting up and daily activities of the Small Business Enterprise. This Small Business Finance should be done in a way that it properly balances risk and profitability. This financing or funding can be long term or short term. The term depends on the nature of the sources from which the funds are coming. These long term and short term finances actually constructs the capital structure of the Small Business Enterprise. Small Business Entities can use several sources for accumulating their required capital. The main sources of funding can be:

Self-financing by the owner

Owner of the Business can use his own savings for financing his own business. This self-financing can be done through cash or he can take equity loan on his home and can use his other assets.

Loans from friends and relatives

Generally it has been observed that people who start small business takes loans from their friends and relatives and repay at their convenience.

Private Stock Issue

Stock is the capital, which is raised by the business enterprise through the issuance and distribution of shares. The aggregate value of the issued shares of the business enterprise gives the market capitalization of that business organization.

Here one thing must be mentioned that in U.K, South Africa and Australia “share” has the same meaning what we have mentioned above but “stocks” in these countries mean a totally different financial instrument, the bond and sometimes “stocks” is even used to refer all types of marketable securities.

Forming Partnerships

In a partnership all partners invests capital in the business. They share profit or loss whatever is generated by the small partnership business as they have contributed capital and sometimes even property.

Partnership can be of three types:

General Partnership-Here all partners has the power to manage the business and they are personally responsible for the debts. Limited Partnerships-In Limited Partnership there are some general partners and some are partners with limited liability. Here only general partners have control over management, the limited partners are only responsible for the debts to the extent of their investment in the business but they have no influence on the management of the business. Limited Liability Partnership-Here all partners has limited liability but all of them have power to manage the business. Here one thing should be mentioned that financing through partnership must be encouraged because in partnership no Dividend Tax (tax imposed on the realized profit) is needed to be paid whereas in private ownership small businesses it has to be paid.

Venture Capital

Venture capital is a kind of private equity capital, which is supplied by the professional investors and given to new growing businesses on submission of sufficiently impressive business venture plans. In this form of funding the financing is actually done by third-party investors who invest from the professionally managed fund, which is generated by managing the pooled money of others.

Angel Investors

By Angel Investor we mean a wealthy person who lends his own personal funds for setting up a business and in return generally acquires ownership equity of the business. Nowadays some Angel Investors are being organized among them and are forming Angel Groups or Angel Networks, which will engage them in financing small businesses to a greater extent.

Other than the above-mentioned main sources of finance, some small businesses are further funded through Credit Card. But this source of funding should not be encouraged as the interest rates are pretty higher compared to the interest rates associated with bank loan.

Bank Loans also can be a source of funding for a small business but the loan cannot be taken in the name of the business; it has to be taken in the name of the business owner as banks ask for personal guarantee.

Donations, Grants and Subsidies can also be sources of finance for small businesses. In U.S.A, Government Small Business Loans are available through SBA (Small Business Administration) if the small business owners are ready to pledge their personal assets and have a strong business plan and have a good track record of repaying loans. Sometimes these loans have been proved to be better than grants, venture funds or venture investors.