SOURCES OF FINANCING NEW BUSINESS VENTURE

Many entrepreneurs struggle to find the capital to start a new business. There are many sources
to consider, so it is important for an entrepreneur to fully explore all financing options. He also
should apply for funds from a wide variety of sources. Some of the sources of financing are:

a. Personal savings: Experts agree that the best source of capital for any new business is
the entrepreneur‘s own money. It is easy to use, quick to access, has no payback terms,
and requires no transfer of equity (ownership). Also, it demonstrates to potential investors
that the entrepreneur is willing to risk his own funds and will persevere during hard
times.
b. Friends and family: These people believe in the entrepreneur, and they are the second
easiest source of funds to access. They do not usually require the paperwork that other
lenders require. However, these funds should be documented and treated like loans.
Neither part ownership nor a decision-making position should be given to these lenders,
unless they have expertise to provide. The main disadvantage of these funds is that, if the
business fails and money goes lost, a valuable relationship may be jeopardized.
c. Credit cards: The entrepreneur‘s personal credit cards are an easy source of funds to
access, especially for acquiring business equipment such as photocopiers, personal
computers, and printers. These items can usually be obtained with little or no money paid
up front and with small monthly payments. The main disadvantage is the high rate of
interest charged on credit card balances that are not paid off in full each month.
d. Bank Loans & Overdraft: Bank loans serve as a long-term mode of financing
entrepreneurial business. Overdraft facility is for a short-term span. Under a bank loan, the
financial institution shall specify the loan tenure. As well as the timing, amount of
repayments and interest rate. The entrepreneur gives some collateral in exchange for the
bank loan. It serves as the ideal choice for financing fixed asset investments. They offer a
lower interest rate compared to a bank overdraft. However, they do not rank high in the
department of flexibility.A bank overdraft can be of assistance when the bank balance of
entrepreneurs fall below the minimum level. And they can borrow some money from the
bank itself in exchange of a high-interest rate. They are thus ideal for dealing with seasonal
cash flow fluctuations or when the business faces a short-term liquidity crisis.
e. Venture Capital/Investors: This is a major source of funding for start-ups that have a
strong potential for growth. However, venture investors insist on retaining part ownership
in new businesses that they fund. Formal institutional venture funds are usually limited
partnerships in which passive limited partners, such as retirement funds, supply most of
the money. These funds have large amounts of money to invest. However, the process of
obtaining venture capital is very slow.
Corporate venture funds are large corporations with funds for investing in new ventures.
These often provide technical and management expertise in addition to large monetary
investments. However, these funds are slow to access compared to other sources of funds.
Also, they often seek to gain control of new businesses.
f. Angel investors: These are successful entrepreneurs who have capital that they are
willing to risk. They often insist on being active advisers to businesses they support.
Angel funds are quicker to access than corporate venture funds, and they are more likely
to be invested in a start-up operation. But they may make smaller individual investments
and have fewer contacts in the banking community.
g. Government programs: Many national and regional governments offer programs to
encourage small and medium sized businesses. Examples in Nigeria include: Bank of
Industry, Central Bank of Nigeria Entrepreneurship Scheme, SMEDAN etc

h. Retained Earnings: A company generally does not distribute all its earnings amongst the
shareholders as dividends. A portion of the net earnings may be retained in the business for
use in the future. This is known as retained earnings. It is a source of internal financing or
selffinancing or ‘ploughing back of profits’. The profit available for ploughing back in an
organisation depends on many factors like net profits, dividend policy and age of the
organisation.
i. Trade credit: This is the credit extended by one trader to another for the purchase of goods
and services. Trade credit facilitates the purchase of supplies without immediate payment.
Such credit appears in the records of the buyer of goods as ‘sundry creditors’ or ‘accounts
payable’. Trade credit is commonly used by business organisations as a source of short-term
financing. It is granted to those customers who have reasonable amount of financial standing
and goodwill. The volume and period of credit extended depends on factors such as
reputation of the purchasing firm, financial position of the seller, volume of purchases, past
 record of payment and degree of competition in the market. Terms of trade credit may vary
from one industry to another and from one person to another. A firm may also offer different
credit terms to different customers.
j. Hire Purchase Finance Arrangement: Firms that engage in selling on installment basis
can make arrangement with hire purchase firms to make credit facilities available to
customers. Alternatively, a firm may make hire purchase agreement with its customers.
This may be known as block discounting. Thirdly, a hire purchase firm can buy the
product directly from the manufacturer, and thereafter make direct arrangement with
customers.
k. Lease Financing: This is an important source of long-term funds. It may be used as a
source of financing company expansion or for modernization of the productive apparatus
of the firm. Thus, through leasing, a company may make use of equipment without
actually owning it. The main objective of leasing is to put at the disposal of a firm a plant
or any fixed asset which serve the productive need of such a firm. The firm, in making
use of that equipment, is obliged to pay to the lessor adequate sum of money which
constitutes cost on the part of the firm.