One of the great factors that turns proper off when thinking of establishing a personal business is the fear of where to get capital. However, provision of capital should not discourage us from the great possibilities that can be ours though entrepreneurship. Rather, we should first catch the vision and then trust God all the way.
Capital is any amount of wealth employed to start and operate a business. Capital is required to pay start-up costs, handle short term recurrent needs and to fund growth. It is the money an entrepreneur needs to begin a business. It is also called seed money. Where to find this seed money depends, in part, on the nature of the proposed business and the amount required.
There are several sources of financing which includes:
- Personal Savings
Personal savings includes cash and personal assets that can be converted into cash. A prospective entrepreneur can start laying aside a specified percentage of his or her earnings or she decide to sell some assets to raise seed money.
- Family and Friends
The next most common source of capital for a new business is family and friends. If the entrepreneur lacks sufficient capital to start up a venture, then he/she will ask family or friends for loan. However to minimize possible problems with financing a business with funds from family members and friends, the entrepreneur should endeavour to keep the business arrangements strictly business. Also, any loans or investment from family and friends should be treated in the same business-like manner as if the financing were from an impersonal investor.
- Commercial Banks
One can also approach commercial banks who offer different forms of bank loans to customers. These loans are usually given on short term to small businesses to project their position in the immediate future. The loans provided require some guaranty or collateral in form of assets such as land, equipment, car and building belonging to the business or the entrepreneur.
- Trade credits
This is a form of short-term financing in which an entrepreneur buys goods or services now and pays for them at a later date. This source of financing is very convenient. However, it requires that a business should have a good credit rating, good credit history or a good history of repayment.
- Angel investors
Another source of financing is through angel investors. There are wealthy individuals who are entrepreneurs themselves. They invest in smaller businesses in exchange for a percent of ownership. They offer money and expertise as well as share in the risk of the business.
- Thrift and credit cooperatives
Many of our workplaces have one form of cooperatives or the other. We can join one to raise capital for our prospective business. Cooperatives are avenues for organising self-help in communities. They provide opportunities that enable their members raise funds to finance small businesses. Members contribute funds to cooperative schemes and in turn can borrow to finance their business activities.
- Partnership funding
Another way of raising fund is for an entrepreneur to enter into partnership with another person. The new partner brings into the business additional capital. This source of financing creates dilution in ownership of the business. These are also certain formalities that must be observed like the pitting in place of a partnership deed. Also, the entry of a new partner means that the risk of the business will be shared. However, you must be mindful of the partnership, as it is commonly said that two cannot walk together except they agree or have the same motive and motivation.
- Retained earnings
This is an alternative source of financing growth and expansion. The profit of a company after paying tax and dividend is called retained earnings. A company can reinvest this profit in the business. Small businesses, which have fewer financing alternatives can always keep and reinvest their profit. This source of financing is the most favoured source of meeting long term capital needs of small businesses because it saves interest payments that would be incurred in case the business has to find alternative source of financing, especially borrowing.