Why Do Entrepreneurs Need to Finance for Business?

(Finance, Accounting, Taxes & creative knowledge)

Entrepreneurs Need to Finance for Business

Entrepreneurs are the business decision makers need money to start their business. They have to buy or hire the assets. They will need to make or supply their goods and services.

Once it has been set up, the business must meet its short – term debts that come from trading activity such as buying stock on credit. That short- term finance is known as working capital. Any business without sufficient working capital will find it difficult to survive. The effects could be that it cannot take advantage of cost- saving discounts because it doesn’t have the cash available its  creditors (suppliers on credit )will demand payment of the money owed to them, and can even take legal action and force the business to close down, selling off its assets to meet the business’s debts .

Businesses also need long-term capital so that they can expend. There are many sources of long –term capital: person saving for sole traders and shares in limited companies are two well- known examples.

“Sources of finance for the private sector”

The most common private sector business organisation – sole traders. Partnerships and limited companies – use both internal and external sources of finance.

These businesses raise internal finance funds by:

*retained profits: some profits are kept to develop the develop the business, not withdrawn and spent by the sole traders/ partners or distributed as shareholders dividends.

*selling surplus assets: that are no longer required.

*using trade credit – the owners my use credit offer to them by their suppliers , and also reduce the credit period they  offer to customers to get more money in quickly.

*Investing surplus cash: the interest on this investment being a source of finance.

*Reducing stock held: so that cash is released and not tied up in these stocks.

The largest amounts of finance for private sector businesses usually come from external sources, which are often long-term:

*Personal saving: of the sole traders and partners and borrowing from their family and friends.

*Issuing shares- the main source for most limited companies, or using venture capital.

*Loans and mortgages: from bank, building societies and other financial organisations, or buying assets using credit sale or hire purchase.

*Using finance houses:  e.g. leasing (a form of renting) equipment such as photocopiers, or buying assets using credit sale or hire purchase.

*Overdrafts: form banks – a short – term source where the business arranges with the bank to withdraw more money than there is in its account.

*Factoring Debts: the business sells its debts to a debt factor company, receiving most of the debt’s value immediately rather than having to wait for the full debts to be paid.

 

Key words

*All private and public sector businesses need finance to start, survive and grow.

* Public sector organization is funded mainly from taxes, borrowing, or profits made from their trading activities.

* Business decision makers need money.

* Finance need to buy or hire the assets.

*finance is known as working capital.

* Businesses also need long-term capital so that they can expend.