Sources of Business Finance available to Private Limited Liability Company

Sources of Business Finance Available to a Private Limited Liability Company is Educareguide topic of concern.

Indeed, many people and students writing various kinds of examinations across the globe research this topic.

Therefore, it is unsurprising that you are finding out about this topic.

Indeed, money is the lifeblood of every business organization, and thus no business can grow without a sound liquidity position.

For this reason, the management of every business should put specific measures in place to raise the needed funds for the company’s expansion.

Now, what are the sources of finance for a private limited company?

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How Can A Private Limited Companies Raise Finance?

Factually, your business needs to be financially sound to operate and expand. Not only that, but you also need cash to meet your immediate expenses as they fall due.

Thus, the availability of monetary funds ensures the business meets its financial obligations.

Interestingly, a private limited company can raise finance from the listed sources.

Explicitly, two primary sources of finance are available to business enterprises – Internal Source of Finance and External Source of Finance.

In this regard, a Private Company is a business enterprise set by individuals between 2 to 70 to carry out business to profit.

Also, a Limited company is one in which private property, other than those contributed by the shareholders, will not be used to pay the company’s debts in the event of bankruptcy.

Now, find out our other guides’ detailed features or characteristics of a private limited liability company.

Currently, we emphasise examining the Sources Of Business Finance Available To A Private Limited Liability Company.

Meanwhile, it would help if you also remembered that sources of finance for public limited companies are pretty different from those for private limited companies.

Furthermore, several examining bodies, including ACCA, often ask questions on this sub-topic in the Business Management examination.

Therefore, Educareguide is here to assist you in understanding this topic fully.

Now, look at Sources of Business Finance Available to a Private Limited Liability Company below.

What Are The Sources Of Capital For A Profit-Making Company?

The following are the sources of business finance for a Limited Company:

Retained Profits:

It is the undistributed profit of a business. In other words, it is the accumulated profits that the firm has made over its years of operations.

Here, “accumulated” means the profit is an add-up gain over the years. Again, there are no issuing costs involved in these sources of capital.

Also, this is because the money is already in the business. Now, other features of retained profits are listed below:

Features Of Retained Profit:

Firstly, the business shareholders are not directly responsible for this decision, and indeed, this type of decision is within the jurisdiction of the company’s management.
Secondly, the directors make the retention decision concerning dividend sharing. Thus, the company’s decision on retained profits is within the control of the board of directors.
Thirdly, it is time-saving: – That is to say, there is no delay in accessing this source of funds. Emphatically, it is because the money is already in the business.
Lastly, there is less scrutiny.

However, you must realize that the owners may not receive higher dividends if the business uses the Retained profits for expansion.

This is because a dividend is a payment to shareholders out of profit. Also, it is the return on the investment of the company’s owners. As a result, shareholders are sensitive to the dividend retention policy.

Shares is a unit of ownership right in a company. For this reason, when you acquire a share in a company, it gives you the right to become one of the owners of that business.

Indeed, there are two types of shares that a company may issue – Preference shares and Ordinary Shares.

Debentures:

Indeed, s debenture is an acknowledgement of a loan given to a company. In other words, debentures are long-term liabilities that an enterprise acquires for expansion.

Unlike share (i.e. Ordinary Shares), debenture has a fixed interest rate paid to the creditors every year.

Also, the interest expense that the business pays to debenture lenders is allotted out of the company’s income whether the entity makes a profit or not.

Furthermore, it would be best to realize that the company pays debenture holders ahead of shareholders during the liquidation process due to bankruptcy.

Emphatically, this is means that when the business is winding up, it sells its assets and pays 0ff the debenture holders first before paying shareholders.

Again, this is because the debenture holders are only creditors to the business, while shareholders are the business owners.

Bank Loans:

Bank Loans are credit facilities that a bank gives to its customers. In this case, the bank is the lender, and the business is the borrower.

Also, Bank Loans have a fixed rate of interest. To emphasize that, this fixed rate of interest is payable whether the business makes a profit or not.

Indeed, a business’s ability to get a loan depends on the business organization’s creditworthiness. For this reason, you must build your credit rating over time so you can qualify for a higher credit facility in the future.

Notably, a bank loan may be secured or non-secured. If it is secure, then it means that the borrower pledges a specific asset against the loan as collateral security. If otherwise, then the loan is unsecured.

Mortgage:

A mortgage is a long-term loan used to acquire a property, and the business uses the same property as collateral security for the loan.

Mortgages come with a fixed interest rate, and duration goes typically beyond 20 years. Every mortgage agreement is a secured loan because the company pledges a definite asset towards the loan payment.

In a mortgage arrangement, a financial institution will only give the business a loan if it will use it to acquire that specific property.

Sometimes, the bank will even take the seller’s details and pay the money directly, ensuring that the company does not misappropriate the funds.

In a mortgage contract, the ownership of the property rests with the bank or the financial institution until the borrower makes the final payment to the bank.

As a source of finance, the Enterprise uses a mortgage to acquire assets such as buildings, land, Machines, Equipment, etc.

Hire Purchase:

A hire purchase agreement is a contract in which a vendor sells a product or item to a business or an individual, where the customer receives and pays for the product by installment. The seller is known as the vendor and the buyer is known as the vendee.

Normally, the vendee makes an initial deposit to the vendor, and the rest of the payment is spread over a period to be made by installment.

The initial deposit paid is known as a down payment. Also, the seller adds some interest to the item sold in order to cater for the loss in the value of money as a result of inflation.

Furthermore, the ownership of the product still rests with the vendor until the final payment is made, even though the customer will possess the item after making the down payment.

This source of finance is very popular when it comes to the acquisition of products such as machines, equipment, devices, etc.

Leasing:

Leasing happens when a business rents out its property to another person or organization for use in return for money.

Henceforth, these amounts are invested into the operations of the business. In a lease arrangement, the ownership of the property still rests with the Leasor, even though the Leasee would be using the property for whatever purpose.

Moreover, it should be remembered that every lease arrangement has a definite period that it covers. Example of assets that may be leased includes Land, Building, Machine, Equipment, etc.

Sale and Lease-back:

Sale and Lease-back is an arrangement where a business sells its asset or property and again leases it back from the person it sold to for the purposes of its business operations.

This type of finance is a very interesting one and I will explain it to you. When the business sells the asset, it will get bulk money.

The business then rents back the asset from the new owner and pays the rent with a little portion of the proceeds from the sale of the asset.

As a result, a bigger portion of the asset is left for the business to invest in its operations.

Furthermore, it should be noted that, unlike a Lease (discussed above), the ownership of the property is permanently transferred to the new owner.

This is so, despite the fact that the business will still get to use the property.

Venture Capital Fund:

A venture capital fund is a kind of finance in which governments, international financial institutions, and donors, give monies to young but vibrant businesses in order to assist them to expand.

Sometimes, in the case of the government, this assistance is offered with the expectation that the business will operate in a vital sector of the economy and also give employment to the people within the community.

Venture capital normally comes with little or no interest in the business. Nevertheless, the money is supposed to be paid back to the lender after a certain period of time.

The very good thing about venture capital is that the borrower is normally a moratorium. This means that the borrower is not required to service the loan immediately after taking it.

Business Angels:

Business angels are individuals who fall in love with certain small businesses or business plans. They then go ahead to fund these businesses.

Business Angels may decide later to go ahead and become shareholders of these businesses or not. What matters is that the monies that business angels give are donations and grants, and thus, they are free.

What Are The Funding Sources For Private Limited Companies

The Frequently Asked Questions On Sources Of Business Finance

What is the types of Business Financing for a Private Limited Liability Company?
What are the five sources of finance available to a Private Limited Liability Company?
Identify a source of business financing for a private limited liability company.

Indeed, even large firms in advanced countries, such as the United States, United Kingdom, Germany, Canada, Australia, need some capital from an external sources to be injected into their businesses.

For this reason, enterprises from less developed and poor countries in sub-Sahara Africa, such as Nigeria, Ghana, Sierra Leone, The Gambia, Malawi, South Africa, Namibia, Kenya, Rwanda, Liberia, etc., need it even more.

This is because, one of the major reasons for the non-competitiveness of companies in the least developed countries, is the lack of capital investments.

Other Remarks

To conclude, I will say that Sources of Business Finance Available to a Private Limited Liability Company is a vital concept.

Thus, that every student, individual, and business knows and understands. Indeed, this will help you to assess and evaluate them to know which alternative of finance is the best suitable for your organization.

Find Answers To The Following Questions As Well:

Conclusion:

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