Sources of Business Financing

The crucial role of adequate capital in starting and operating a business should not be overlooked.  Both the availability of capital and the form of financing for a newly established business will be for many a deciding factor in the development of that business.

Financing can come in the form of a loan (debt financing) or in sharing the ownership of your business (equity financing).

Loans (debt financing) are usually classified as follows:

1. Short-term Loans.  This category is used to designate borrowed capital that is to be repaid within one year.
2. Intermediate Loans.  This title is applied to borrowed capital which is to be repaid in one to five years.
3. Long-term Loans.  This capital has repayment arranged for more than five years.

The business person should determine which form of financing is the most beneficial to his/her business and then approach those lenders who specialize in that form of financing. 

 For example, a business person who is seeking money to expand inventory (short-term loan) should go to a commercial bank instead of a savings and loan company.  Commercial banks specialize in short- and immediate-term loans.  Some savings and loan institutions now make medium-term loans even though they historically only made long-term loans.

Finally, two things should be recognized when one is faced with the problem of obtaining capital assistance:
1. an established concern with a good record of operations usually has better access to available sources of capital than a new firm.
2.  Some personal capital available for investment in the firm by the new owner is almost always essential to obtain any type of outside assistance.

The following are several sources of funds for small firms with a brief description of the source:

Personal Funds
Whenever potential creditors, partners, or stockholders are invited to invest in or lend financial assistance to a new firm, their first question is, "How much does the owner have invested?"  In any event, it is important that the owner have assets of his own to invest in the firm.  The closer to fifty percent of the total capital needs that can be provided; the greater will be his independence and share of net profit.

Loans From Relatives and Friends
Many new owners are encouraged in their enterprise by parents, relatives, or friends who offer to supply loans to the firm to get it started.

However, mixing family or social relationships with business can be dangerous.  Many unpleasant situations might have been averted if the terms of the agreement had been more clearly specified, including the rights of the friend or relative to insist upon making business policy.  The best way to avoid problems is to make sure that agreements are made on a business-like basis and viewed as business dealings.  These agreements must provide for termination of business, death of partner, etc.

Trade Credit
Trade credit is the financial assistance available from other firms with whom the business has dealings.  Most prominent are the suppliers of inventory which are constantly being replaced. For example, if a P20, 000 inventory can be purchased for a P10, 000 down payment and the balance in 30 days, the wholesaler has virtually provided P10, 000 of required capital to run the business.

Loans or Credit From Equipment Sellers
This type of financial assistance is often considered another form of trade credit.

Mortgage Loans
When the new firm's planners own a commercial building, they can secure a mortgage loan on it with payments over the long term.  If the firm will operate out of the building, the planners will be making mortgage payments instead of rental payments to a landlord.  Mortgage loans are typically made by savings and loan associations, mutual banks, and mortgage banking institutions.

Commercial Bank Loans
Commercial banks are generally short-term lenders who assist businesses in expanding their working capital needs for inventory and accounts receivables.  Banks, however, will make longer term loans which are sometimes guaranteed by government.

Government Lending Programs to Small and Medium Enterprises
Government lending programs are available to small firms from agencies such as the Small Business Corporation, Quedan Guarantee and Finance Corporation, Philippine Export-Import Credit Agency, National Livelihood Support Fund (NLSF).  These agencies provide loan guarantees and make direct loans to small firms.  These loans generally are intermediate or long-term. 

Small Business Investment Companies or Private Equity Funds
These are privately owned companies which make long-term loans and even take equity positions in small businesses.  Funds from P 1 million to P 20 million or more have been obtained by new companies from these sources.

Venture Capitalists
If your business is a start-up, you may approach a venture capitalist. Venture capitalists take equity positions in firms they believe can rapidly increase sales and generate substantial profits.  Why?  Because venture capital firms invest for long-term capital gains, not for interest income.  Most venture capital firms are interested only in investment projects requiring an investment of P50 million and up.  Projects requiring lower amount of investments are of limited interest because of the high cost of investigation and administration.

Non-Government Institutions and other Micro Finance Institutions

NGOs and other micro finance institutions finance new projects but may require the borrower to undergo preparation such as values formation or teambuilding seminars that fit into their special lending schemes.

At this point, I hope I have enlightened you on some aspects of financing assistance for young entrepreneurs. I also hope that you have been inspired to become one. Our future depends on the youth of today and our country needs young entrepreneurs with a fresh vision for business. Let’s do business!