Finance plays a pivotal role in the management of business and personal matters. Proper financial planning and money management are critical to ensuring a company's success and a consumer's secure future. Financing provides the means to launch a new business, expand an existing enterprise, settle a short-term funding crisis, or cover daily expenditures. The most common financing sources in the U.S. are 1) automotive financing, 2) savings institutions, 3) commercial banks such as credit unions 4) credit cards, 5) accounts receivables and factoring, and 6) investment companies and venture capital firms. What follows is a discussion of some of the most popular forms of financing:
1. Credit cards
Credit card financing is extremely enticing to consumers due to the fast availability of funds and the convenience it offers. Credit cards provide customers the opportunity to purchase items on the spot and pay for the goods at a later time. An increasing number of individuals are utilizing business and personal credit cards, issued by banks or other lending institutions, to finance start-ups and fund business purchases. A recent survey shows that almost 81% of small enterprise owners rely on credit cards for financing their ventures. Experts found that the credit-card financing of well-conceived, promising start-ups that are financed through credit card debt paves the way for faster success. Credit cards are a tremendous asset to internet businesses, since their start-up costs are typically low and consequently fail to appeal to venture capital firms. With the average cost of launching a web-based business being under $50,000, prospective business owners with a good credit rating can easily finance this amount via credit cards.
Small businesses may utilize credit cards for two central purposes. First, credit cards can help emerging small businesses acquire assets such as copiers, telephones, computers, fax machines, printers, scanners, mobile phones, office supplies, and other business-related devices and equipment. Business owners can obtain these with either no or little money down and by paying small monthly installments for a period ranging from 24 to 60 months. Office-supply franchises usually extend special monthly payment terms for personal credit cards and their store cards. Secondly, credit cards may serve as working capital and assist business owners in managing cash flow.
There are numerous advantages to utilizing credit cards:
- They are easy for most individuals to obtain;
- They are simple to manage;
- The interest paid can be deducted as a business expense; and
- The annual fees on some credit cards are lower than those charged by commercial lenders
2. Commercial banks
More than half of small business borrowers prefer to finance long-term projects by utilizing the services of commercial banks, such as credit unions. This is partly due to the fact that commercial lenders typically charge the lowest interest rate. Small business owners are offered the prime rate, or the rate that lenders charge their top commercial clients. Small businesses consider credit unions and other commercial creditors to be their right hand in financial success.
It is recommended that small business entrepreneurs build a relationship with their bankers, for instance, by inviting them to visit the company and offering them a tour of the premises. Credit unions and other commercial lenders are more disposed to extend a loan to a business with which they are acquainted and share a history of correspondence. The importance of building a personal rapport with a commercial lender especially holds true for small companies that 1) are in a novel or unconventional business field that cannot be easily analyzed by utilizing traditional lending factors and 2) have a short credit history.
3. Accounts receivables
Receivable financing involves the pledging of receivables by a business in exchange for a loan by a creditor of up to 80 percent of the receivables' value. The business informs its clients that their accounts are serving as collateral, and payment is made to the business, rather than to the lending institution. Upon collection of the accounts receivables, the company pays the creditor, thus lowering the loan base and balance until future sales are utilized for computation of the new borrowing base.
4. Investment companies
Venture capital firms and small business investment entities can assist borrowers with investment planning as well as business initiation and expansion. Unlike traditional borrowing through a lender, financing through a venture capitalist or an investment company does not require the payment of interest, but rather part-ownership (a stake in the equity) of the business. One advantage of financing by way of equity is that business owners do not repay the provision of capital as they would a loan. Venture capitalists or investment firms earn profits through value-appreciation of company shares or through dividends distributed to company shareholders. One of the conditions that these funds investors set for the financing of businesses is that they be accorded the right to evaluate management decisions or, in some circumstances, to select their own managers to supervise specific areas of the business. Investment companies and venture capitalists maintain a considerable measure of autonomy over the strategic direction of their client's business. On the other hand, the business owner is in charge of daily management of his or her enterprise.