It is rightly said that finance is the life-blood of business. No Business can be carried on without source of finance. The financial manager is mainly responsible for raising the required finance for the business. There are several sources of Finance and as such the finance has to be raised from the right kind of source. Generally speaking, there are two sources of finance as follow: 1) SPONTANEOUS SOURCES:
Finance which naturally arises in the course of business is called as ‘Spontaneous Financing’. Trade creditors, credit from employees, credit from suppliers of services etc are the examples of spontaneous financing. 2) NEGOTIATED FINANCING:
Financing which has to be negotiated with lenders, say commercial banks, financial institutions, general public are called as ‘Negotiated Financing’. This financing may be short term in nature or long term. Other sources of finance are organized and shown in the below figure as follow: Sources of Finance
Short Term Financing
Long Term Financing
Figure (1): Sources of Finance.
Any business needs to finance its firms or promising ventures due to the following reasons as follow: 1) Start a business.
2) Finance new Technology.
3) Open new Market.
4) Moving to new premises.
5) Day to day running of business.
As requested, this report will guide anyone who wants to start his own business by explaining short, long and medium terms in details along with the traditional and Islamic finances aspects as well. Valuable advices and recommendations obtained from presenting the Pros and cons of each type of sources of finance are summarized in the conclusions sections of this report.
2.0 Traditional Sources Of Finance:(1)
The common hope when starting a business is that it will generate incredible profit, the business will become self-sustainable, its accounts will be swollen with cash, and the owners will retire into the sunset. Before this can happen, however, the business’s financial engine must be primed. This section discusses three traditional sources of financing: personal savings, friends and family, and bank financing along with its pros and cons for each as follow: 1) PERSONAL SAVINGS:
Instinctively, the first place that most of us look for financing is in our own pockets. How much money do we have in our piggy banks or under our pillows? When a venture is just an idea in our mind, we combine cash with ‘sweat equity’ to develop the business plan, educate ourselves about the market, and prepare ourselves. Those who are fortunate enough to have amassed sizable savings can look to finance equipment purchases, all or part of a business purchase, and more. PROS:
a) No external oversight. You can spend the funds as you see fit without having to provide an accounting of funds, explain expenditures, or handle other administrative matters that might otherwise distract from your goal. b) Fast turnaround with no bureaucracy. Getting the cash is as fast as ‘cashing in one’s chips.’ Maybe you have to withdraw money from a personal bank account; maybe you have to sell off an asset. There are no forms to fill out, no wait for a committee; once the decision is made its full speed ahead. CONS:
a) Limited availability of cash. Few people have sufficient financial liquidity to personally foot all of a business’s initial and ongoing financing needs. b) No external accountability. If you have no one to report to and are not required by a lender or investor to follow any specific processes, you are vulnerable to co-mingling of business and personal funds, lack of proper financial record keeping, and other mistakes. c) Expense. You may recognize the acronym OPM (other people’s money). A generally accepted...
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