Sources of Finance for Entrepreneurs: A Guide for Commencing Business

This report provides a comprehensive guide on various sources of finance available for entrepreneurs to commence their business. It covers the pros and cons of different finance options such as bank loans, equity capital, debt capital, bank overdraft, venture capital, retained earnings, and borrowing from family and friends. The report also highlights the factors that affect the choice of finance sources and the legal environment surrounding SMEs' access to finance.

Sources of Finance

Table of Contents
INTRODUCTION ..........................................................................................................................3
TASK ..............................................................................................................................................3
Sources of Finance......................................................................................................................3
CONCLUSION ...............................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
In order to manage the functions of organisation, it is needed to have adequate liquidity of funds
so that it can operate its functions smoothly. At the time of commencement of business, there
are various sources of finance that helps an owner to establish its enterprise. Finance sources can
be utilised for both existing firm in order to expand its operations and for new establishment
(Chit, 2019). Companies opt for the most suitable and cheaper option in order to maximise its
profit. This report is based on sources of finance that Paul, an entrepreneur who is about to open
his first hotel and this report will provide him with various alternatives of finance that eh can opt
for. Further it will also cover the pros and cons along with various other cost related to
commencement of hotel business.
TASK
In every business, finance is the most crucial element that plays a vital role in the success
of any enterprise. There are various cost associated from the commencement of business till
performing its activities. As many entrepreneurs have the idea of establishing business but due to
lack of availability of funds the growth becomes limited. But in today's business world, many6
companies and financial institutions provides with different sources of finance that helps various
entrepreneurs in commencing their business unit. Following are some sources of finance that
Paul can opt for his hotel.
Sources of Finance
 Bank Loan – There are many private and public banks that facilitates the loan to its
customers. Apart from these banks, various financial institutions provides with granting
loans based on their income or assets. For granting the loan, these financial institutions
and banks charges interest on the loan amount. Companies uses this method in order to
raise their capital and when it want to expand its business operations (Cassar, 2021).
There are various types of loans that an entrepreneur can opt for such as mortgage loan,
secured and unsecured loan. Unsecured loans are those funds that can be obtained
without placing any collateral security against loan. Paul can opt for this option as it is
easily available but the major disadvantage of opting this alternative is, as the interest
charged on loan is higher that becomes risky in case of fail in repayment of instalment
amount.

 Equity Capital – This is the most common alternative that companies uses to raise
capital from public. Under this source of finance, a company sells its ownership in the
form of small units called shares. But somehow is is costly to debt as the income received
in the form of dividend that is distributed to shareholders is non tax deductible. In order
to raise the equity capital from market, it requires many legal formalities that are needed
to be done prior to inviting the investors.
 Debt capital – It is somehow similar to taking loans and advances. Companies opt this
option by taking funds from the people by issuing debentures. In other words debentures
are the loan capital of the company and company pays interest on it over a regular
interval of time (Farag and Johan, 2021). The main advantage of opting this option is that
company can use the fund and pays a nominal amount in form of interest. But debentures
are against charge of profit which means if company suffers loss then also it have to pay
the interest.
 Bank Overdraft – Several banks provides with overdraft facility to their customers. This
helps companies to meet the emergency requirements in order to eliminate the
interruptions of business activities. They are highly expensive and should be used in case
of emergencies only. They are not suitable for long term financing as it does not provide
long term finance.
 Venture Capital – It is similar to equity shares but the investor in venture capital are
known as venture capitalist (Kitchen, McMillan and Shah., 2019). Before investing they
analyse the market and seek the opportunities of a company. They gets exit once the
company starts getting reasonable valuation.
 Retained Earning – In this sources of finance, companies use their profits and savings
and reinvest in case of growth period. Rather than drawing their profit, they tend to
reinvest so that they can earn more profit. It is suitable for existing business enterprise
and by opting this alternative they can expand their business operation.
 Family and Friends – Many entrepreneurs takes help of their friends and family and by
borrowing funds. This is the most cheapest and flexible source of finance in which the
interest rate is very low as compare to other finance sources. On the other hand there is
not much risk involved in case of delay in repayment of instalment. The banks impose
penalty on delay but this alternative is flexible in nature.

CONCLUSION
From the above project report, it was concluded that for commencing any business it is
needed to have sufficient fund or various sources are available in the market that an entrepreneur
can opt for and establish their business. Every alternative is not suitable for every business as it
depends on various factors such as nature of business, size and scale. The company should
choose wisely and analyse all the alternatives in terms of pros and cons associated with it. It has
been analysed that Paul should opt for the option of taking fund from their family and friends as
they are much cheaper as compare to other alternatives. It does not involve longer formalities as
it is done in case of taking loans from banks or other financial institutions. Paul can also get the
advantage of lower interest rate that makes this option more feasible.

REFERENCES
Books and Journals
Chit, M.M., 2019. Financial information credibility, legal environment, and SMEs’ access to
finance. International Journal of the Economics of Business, 26(3), pp.329-354.
Cassar, M., 2021. Examining the factors that affect the choice of sources of finance of local
banks (Bachelor's thesis, University of Malta).
Farag, H. and Johan, S., 2021. How alternative finance informs central themes in corporate
finance. Journal of Corporate Finance, 67, p.101879.
Kitchen, H., McMillan, M. and Shah, A., 2019. Provision and Finance of Infrastructure. In Local
Public Finance and Economics (pp. 207-251). Palgrave Macmillan, Cham.