Finance Roll

Adequate capital is critical for the success of every business. Many businesses fail because of lack of funds. You need money at every step of your business, be it expansion, modernization or diversification. Any business requires both short term and long term funds. Short term funds are required to meet the short term needs of a company, i.e. purchasing raw material, paying wages, overhead expenditure, etc. Long term funds are required to meet long term business needs which include acquiring fixed assets – land, building, machinery, etc.

Companies raise capital from two sources – equity financing and debt financing. Equity financing involves raising money through the allotment of the company’s shares to the public. This way, whoever buys the company’s shares becomes an owner of the company. Besides individual investors, other companies and financial institutions also buy shares. Venture capitalism is a type of equity financing. A venture capitalist invests money in the stocks of a start up which is usually founded by a person with a technical expertise.

In case of debt financing, a company issues debentures or takes out business loans [http://www.finance-hub.co.uk/securedbusinessloan.html]. Whoever buys the debentures becomes a creditor of the company. The company pays interest to the debenture holders at a fixed rate of interest. Alternatively, the company can take out a business loan from a lender, which may be a bank or a financial institution. The loan may be a short term or a long term loan. The decision on whether to go for equity financing or debt financing depends on the company’s profitability. If the profit margins are low, the company should go for equity financing, whereas in case of a high profitability, debt financing would be more sensible.

If you are setting up a small business, you can use your own funds. If that is not sufficient, borrow from friends and relatives. If you fail to borrow sufficient funds from friends and relatives, you can take out a business loan from a bank, a building society or a private lender. A business loan can be secured or unsecured. To obtain a secured business loan, you may offer your residential or commercial property as collateral.