Spontaneous business financing
Spontaneous business financing refer to cash flow obtained from the normal transactions of business like trade credit, bank overdraft, and government grants. A glimpse of these business financing sources is in order.
Trade credit is the finance extended by the suppliers of services or goods. It is one of the spontaneous sources of finance for the reason that it arises in the normal transactions of the business firm without specific negotiations. The critical qualification is that the supplier views the firm as being credit worthy. It is a very important financing tool for both small and large businesses.
In most cases a new company may have difficulties in obtaining finance as compared to a well established firm. The confidence of suppliers to enable you obtain credit can be achieved by discussing the financial intuition and showing realistic plans. Honoring your commitments is very vital as broken promises erode confidence from the supplier and may result in their withdrawing the line of credit.
Suppliers look at the ability of the firm to meet its obligations in the short run. This is measured by the current ratio and acid test ratio. If the firm has been paying the suppliers on time in the past it is deemed to be credit worthy.
The cost of trade credit can be very high or affordable depending on the terms of credit offered by the supplier. What will be very costly, however, is the additional trade credit obtained. Investors are not advised to take up more than what is sufficient for the simple reason that the discounts given for quick payments are welcome. It is important to utilize these unless off course, ther business is hard pressed financially.
Working capital advance
Working capital advance is a spontaneous source of financing provided by commercial banks. This is the most important source of financing especially for small business. A customer is only required to submit an application form for different categories of advances. The application should be supported by various statements like profit and loss account, balance sheet and financial projections of the business.
Overdrafts are also spontaneous source of finance. These are lines of credit attached to a check account which allows businesses to operate in day to day basis. Its mechanism is similar to working capital. The interest charged on overdrafts is variable and is calculated daily on the balance outstanding. This facility has the following features:
- A variable interest rate;
- Fluctuating balance with no set repayments; and
- Access to your funds in various ways like online or telephone banking or checks.
However, collateral is always required by some lenders while others do not usually need it. Business overdrafts are only essential for freeing up your liquid capital but not recommended for long term financing needs as the interest rate can be higher.
Governments provide grants and loans to people willing to start their own businesses and to the existing businesses that may need to expand. If you intend to use grants from the government, you must ensure that you have a proper plans for seeking the funds. Government grant spontaneity is sometimes limited to specific industries like tourism, agriculture, exports, arts and cultural innovations among others.
The ability of a business to get any of these funds will depend on its ability to win favour with the relevant institution or authority.