Different types of businesses all have different ways of funding their firms. Whether you’re a sole trader, partnership or a public limited company, you will have different options available to you when it comes to money.
Let’s first look at sole traders and partnerships.
Owners funds are often important to sole traders and partnerships. Owners funds are the financial resources put into a business by its owners. Depending on the type of business, there may be a number of owners, each with financial backing to put into the business.
Owners funds as a source of finance will increase in importance the more owners there are. Owners can use various sources of their own finance to start a business, such as redundancy pay-offs and life savings.
This type of funding can also be important for established sole trader and partnership businesses that cannot raise money through share sales, and it is also beneficial as the business is not required to pay interest.
Sole traders are also often forced to source their finance from their own savings, various forms of bank loan and occasionally government grants. However, often banks may not want to lend money to such a business, meaning that the company is left in financial difficulty, especially as sole traders usually don’t have many internal sources of finance.
Partnerships are able to source funding from the savings of each partner involved, as well as from bank loans and government grants. They may also lease items from hire purchase and leasing companies. However, partners may disagree on how to raise funds, and the business itself may not have enough in the way of collateral to receive a bank loan.
On the other hand if you’re a private or public limited company you are able to sell shares to help raise finance.
However it’s worth taking a quick note that private limited companies will often find it more difficult to raise finance in this way than public limited companies, as they are unable to publicly advertise their shares or advertise them on the Stock Exchange.
Additionally in a private limited company they may struggle to raise finance through share sales because all shareholders must agree to the sale.
Putting those limitations to one side for the minute, the idea of selling shares is that companies can raise money relatively cheaply and without too much effort. Whilst companies may pay shareholders a share of business profits (known as dividends) if they make enough profit, they do not have to pay shareholders interest.
However, an entrepreneur may lose control of the business if they sell too many shares – just fyi!
Finally, some companies choose to franchise. However this isn’t considered to be a source of finance.