Financing a business enterprise
Financing of business enterprises is a wide and interesting topic to discuss. It is even more captivating during this period of unrelenting increases of commodity prices in the market and a huge recession in some of the otherwise strongest economies f the world.
This dominance is attributable to the effect that most of us have felt when our businesses have failed to take off, collapsed or succeeded. Most business enterprises depend on adequate financing to start and grow. It is not our contention that this is or should be the only consideration. In fact, there is good management, adequate customers, good marketing and many more.
Hey, we must admit that financing of enterprises will not be interesting to all! Let us try to make it as “palatable” as possible. The following is a brief highlight of the sources of finance for enterprises, how to use it, the pitfalls to watch out for and general information on where to get them.
This is when a business owner uses his personal money or resources to finance a business. He/she may use personal savings, credit cards, sale of assets and salary proceeds. Of these, the use of credit cards may pose a danger for the enterprise due to the possibility of overspending and creation of budget deficits.
Commercial bank loans are also a favorite for these who intend to finance business enterprises. The lending rates and other conditions will vary from bank to bank and also on the type of loan borrowed. For example, banks will ask for collateral before they extend financing to these enterprises that they consider young in the industry. This mode of financing businesses is also called debt financing.
Another method is called venture capital financing. Venture capitalists are people who pool resources for the purposes of investing in business enterprises that they consider profitable but poorly managed. Sometimes, companies invite offers for such capital. If this happens then they become corporate venture capitalists. They possess the necessary experience to inject in the business and will usually want control to be ceded to them.
These are much related to other sources called angel financiers. Angels are individuals who invest in enterprises that they think will offer high returns for their investments. Access to venture capitalists and angel investors to finance your business enterprise is usually through networking or by application to their associations. The collective name given to such business financing is equity financing.
For these enterprises that have attained great heights, an Initial Public Offering (IPO) may be a relevant option of financing. This involves the sale of the company’s shares to the public through the stock exchange. It is important to note that before this happens, the company or business enterprise must get permission from the relevant regulatory bodies. These discussed sources are mainstream.
Alternative sources of enterprise financing
Most investors will always depend on the very conventional means of getting financing either due to lack of information or total misinformation about the lending market and what it can offer. The following methods are valuable but often ignored.
- Advance pay programs;
- Purchase guarantee; and
- Supplier guarantee.
These financing options may not be readily available in banks due to the high risk involved. However, there are institutions and companies that have specialized in offering them. Before choosing the most appropriate method of funding your business enterprise, it will be appropriate to seek expert guidance. Best of luck!