Cash financing for business
Business financing may be simple or complex and it all depends on certain experienced scenarios. The current credit crunch being witnessed in the financial markets across the globe will mean a lot to these who intend to finance both nascent and established businesses.
It will, at once, mean that there will be less pools of money floating around in the credit market for lending. We put forth this position not because financing of a business is impossible, but because it is getting difficult. “Cash financing of a business” is a phrase that will encompass much more than just liquid money.
It does, in fact, have a close connotation to the different sources of business financing and whether these will qualify to be called cash financing. The converse of this will be equity financing or other little used methods like factoring and advance programs. The options available to an investor may fall in one or some of the categories outlined below:
Self financing
This is one of the most widely used methods and it involves the use of personal funds to start or continue the operations of a business. It can be through an individual’s savings, salary or even retirement benefits. For most small businesses, the advantages of cash financing through this method are many.
The major point to note is that self financing leaves the business owner with a lot of autonomy in as far as management and decision making is concerned. However, it is critical to make informed moves when using some of these methods as you will avoid draining your savings.
Angel financing
Angels are individuals in possession of disposable income and who intend to inject it into a business venture. Cash received from angels always comes with some strings attached. These include demands for unusual returns especially if the venture being funded is risky. However, this should not worry you. Some angels will bring in worthy industry experience.
Venture capital financing
Venture capitalists are pools of investors who work with under the same principles as that applied by angel financiers. They inject cash financing into the business in return for equity (part ownership) and a stake in the management of the business.
Corporate venture capital financing
Corporate venture capitalists refer to companies that finance businesses under the same principles as venture capitalists. Although very few, they form part of the cash financing that an investor can rely on to finance a business.
Loans
Commercial lenders will also form part of the sources of cash financing for businesses. The amount of cash advanced through loans will depend on the feasibility of the owners’ business plans. Cash obtained from lenders attracts interest and other charges. These should be well investigated before taking up the loan.
Advantages of business cash financing
- Control of the business will usually be left to the owner and not the financiers.
- Cash flow, which is a critical aspect of the business, will almost invariably be maintained in the business if the owners elect cash financing.
- Unlike cash financing, acquisition of some modes of financing is complicated and may thus incur more money when negotiating and also during the drafting of the agreements.
- Non cash funding may require more understanding than cash financing of businesses.
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