Adequate capital is critical for the success of every business. Many
businesses fail because of lack of funds. You need money at every step
of your business, be it expansion, modernization or diversification.
Any business requires both short term and long term funds. Short term
funds are required to meet the short term needs of a company i.e. purchasing
raw material, paying wages, overhead expenditure etc. Long term funds
are required to meet long term business needs which include acquiring
fixed assets – land, building & machinery etc.
Companies raise capital from two sources – equity
financing and debt financing. Equity financing involves raising money
through the allotment of the company’s shares to the public. This
way, whoever buys the company’s shares becomes an owner of the
company. Besides individual investors, other companies and financial
institutions also buy shares. Venture capitalism is a type of equity
financing. A venture capitalist invests money in the stocks of a start
up which is usually founded by a person with a technical expertise.
In case of debt financing, a company issues debentures
or takes out
business loans
, whoever buys the debentures becomes a creditor
of the company. The company pays interest to the debenture holders at
a fixed rate of interest. Alternatively, the company can take out a
business loan from a lender, which may be a bank or a financial institution.
The loan may be a short term or a long term loan. The decision on whether
to go for equity financing or debt financing depends on the company's
profitability. If the profit margins are low, the company should go
for equity financing, whereas in case of a high profitability, debt
financing would be more sensible.
If you are setting up a small business, you can use your
own funds. If that is not sufficient, borrow from friends and relatives.
If you fail to borrow sufficient funds from friends and relatives, you
can take out a
business loan
from a bank, a building society or a private
lender. A business loan can be secured or unsecured. To obtain a
secured business loan, you may offer your residential or commercial property
as collateral.
About The Author
The author is a business writer specializing in finance and credit products and has written authoritative articles on the finance industry. He has done his masters in Business Administration and is currsently assisting finance-hub.co.uk as a finance specialist.
For more information, please visit
www.finance-hub.co.uk
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