Key Sources of Finance for a Business Start-up

Start-up is the early stage of any business after which it will grow according to the favorable environment in which it operates. The favorable environment in which that may provide good financial support, where new and innovative ideas are formed, and modern business strategies and so on. Every business needs a good financial support for faster growth. Raising money is the hardest part of the business. So the entrepreneurs have to have a clear idea about how to raise enough money for staring a successful business, read more about Crypto Code. The major financial requirements would be start-up costs, investment capacity for starting the business, capital for the smooth functioning, capital for further growth and development etc. The amount of finance required always depends on the size and type of business.

The financial sources are mainly divided into two categories they are

  • Internal sources
  • External sources

What are the Major Internal Sources?

  1. Personal Sources

The most important financial source for a start-up is personal source it should be arranged by the founder. That may be savings, other cash balances or other debt facilities arranged by the entrepreneur. As we all know that personal savings are easily available but every individual have an emotional attachment to this savings. So if you’re investing savings to the business it will help in maximizing the control over the business thereby increase the commitment. The entrepreneur always tries to take steps for improving his business and achieve set goals.

Next personal source is the borrowing and it is a very common way. The friends or family members help the founder by giving money. It is very easy to arrange and the main advantage of this money is that the terms and conditions of repaying are flexible compared to other financial resources(bank loan).

  1. Public Capital

It is a very common method; the founder sells all shares of the company and retains the full control of the company only. The shares are made by using the personal sources of the investor. The company owns the money after making the investment. The shareholder can return his money through dividends. In some cases, the company sells his shares outside investors also.

  1. Reserved Profits

It can only generate cash after trading has begun. That means the start-up sells the first batch, the profit earned by this sales are invested into the further expansion of the business.

 

 

 

What are the Major External Sources?

External sources are also known as loan capital.  It is available in several forms but most commonly used types are bank loan and bank overdraft.

  1. Bank Loan

It is provided as a long-term kind of financial support for a start-up with a bank stating some fixed rules and regulations for the loan like the rate of interest and prescribed time period for the repayments. The bank always buys security for the loan that normally represents in the form of personal guarantees provided by the entrepreneur. The bank loans are the very good financial source but one only disadvantage is that they don’t give much flexibility.

  1. Bank Overdraft

It is a widely used kind of financial source. Overdraft is also a loan facility where the bank gives money to a business in the case where its balance goes to zero, but the bank charges a high rate of interest for same. So the overdraft facility should only be used in emergency situations only.