Sources of finance for a small business

There are a number of sources of capital which can be considered by small business men.

Owner's private savings

The most obvious source is personal savings. Any entrepreneur should have sufficient faith in his project to back it with his own money. If not, he can hardly expect others to risk their money.

The advantage of an owner using his own money is that the business remains free of commitments to partners or outside lenders. It also means that all the profits will be his. They will not have to be shared with partners, nor will heavy interest charges have to be paid on loans.

Personal savings are not, however, 'free of cost'. The cost is the interest that it could be earning elsewhere. There is also the 'opportunity cost' of not being able to do with the money what might otherwise be done. Despite this, personal savings remain the cheapest form of finance available.

'Own resources' are not limited to savings. One of the advantages of taking out an endowment life assurance early in life is that, later, it can be used for raising capital either by surrendering it for cash or as security for a loan from the insurance company or the bank.

Personal friends

Capital can sometimes be obtained in the form of loans from friends, neighbours or relatives. One difficulty here is a friend or relative, though not keen to lend the money, may not like to refuse. Another disadvantage is that, with any business, there is always risk. This means that, if money is obtained in this way, the borrower may one day have to look the friend or relative in the face and tell him that all the money has been lost - a distinctly unpleasant task.

Take on a partner

It may be possible to persuade a person with capital to become a partner in the business. This means that the capital would be interest-free and, unlike a loan, would not have to be repaid. Profits, however, would have to be split. This may be particularly frustrating if the partner is a 'sleeping' one.

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