Sources of Business Finance Available to Private Limited Liability Company

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Sources of Business Finance

 

Sources of Business Finance Available to a a Private Limited Liability Company is educareguide topic of concern. Truly, many people and students writing various kinds of examination across the globe research this topic. WASSCE students are no exception.

 

A Brief Sources Of Finance Notes

Finance or money is the lifeblood of every business organization. Monetary funds which is available is what ensures that the business is able to meet its financial obligations. In simple terms, money ensures that your business is able to pay its expenses. In order to operate and expand, a business needs to be financially sound. There are two main sources of finance available to business enterprises – Internal and External Source of Finance. Furthermore, a Private Company is a business enterprise set by by individuals between 2 to 70 to carry out business with the view of making profit. Also, a Limited company is a company in which the private property, other than those contributed by the shareholders, cannot be used to pay the debts of the company in the event of bankruptcy.  Find out the detailed features or characteristics of a private limited liability company on our site. Our emphases currently is to examine the Sources Of Business Finance Available To A Private Limited Liability Company.

Furthermore, several examining bodies,  including WAEC has asked questions on this sub-topic many times in the Business Management examination. Therefore, educareguide is here to assist you in to fully understand this topic very well.

 

The Other Ways Of Asking The Question

  • 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.

Even large firms in advanced countries, such as the United States, United Kingdom, Germany, Canada, Australia, all need some capital from external source 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., even it the more. This is because, one of the major reasons for non-competitiveness of companies in these areas of the world is lack of capital investments. Now let’s 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. It is the accumulated profits that has been made by the business over its years of operations. To explain further, accumulated simply means that the profit has been added. There are no issuing costs involved when it comes to this sources of capital. This is because the money is already in the business. Other features of retained profits are listed below:

Features Of Retained Profit:
  • The shareholders of the business do not have so much control over it. This is because, these type of decision is within the jurisdiction of the management of the company.
  • The retention decision is made by the directors. This means that, the decision as to the portion of the profits to be retained by the company is within the control of the board of directors.
  • TIME SAVING: – There is no delay in accessing this source of fund. This is because, the money is already in the business.
  • There is less scrutiny.

However, you must realize that, if Retained profits are used for expansion, the owners may not get higher dividend. This is because, dividend which is a payment to shareholders out of profit, is the return of the investment of the owners of the company. Shareholders are sensitive to the dividend retention policy.

 
Shares:

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

 
Debentures:

A debenture is an acknowledgment of a loan given to a company. Debentures are long-term liabilities that an enterprise acquire for the purpose of expansion. Unlike share (i.e. Ordinary Shares), debenture have a fixed rate of interest that is paid to the creditors every year. The interest expense paid to the lenders of debenture must be allotted out of the income of company whether profit is made or not.

Also, it is well noting that, debenture holders are paid ahead of shareholders in the event of bankruptcy and liquidation. This is means that, when the business is winding up and its assets are being sold to be shared, the debenture holders are paid first before shareholders. This is because, the debenture holders are only creditors to the business, whiles shareholders are the owners of the business.

 
Bank Loans:

Bank Loans are credit facilities that are given by a bank to its customers. In this case, the bank is the lender and the business is the borrower. Bank Loans also have a fixed rate of interest. This fixed rate of interest is payable whether the business makes profit or not.

A business ability to get a loan is dependent on the creditworthiness of the business. For this reason, you must build your credit rating over time so that you can qualify for a higher credit facility.

A bank loan may be secured or non-secured. If it is secure, then it means that, the loan is pledged against a specific asset of the borrower. If otherwise, then the loan is unsecured.

 
Mortgage:

A mortgage is a long-term loan that used to acquire a property and the same property used as a collateral security for the loan. Mortgages come with a fixed rate of interest and duration normally goes beyond 20 years. Every mortgage agreement is a secured loan because the loan is always pledged against a definite asset.

In a mortgage arrangement, a financial institution will give the loan to the business only if it will use it to acquire that specific property. Even sometimes, the bank will take the details of the seller and pay the money to the seller directly. This ensures that, the fund is not misappropriated.

In a mortgage contract, the ownership of the property rest with the bank or the financial institution until the borrower makes the final payment to the bank. Mortgage, as a source of finance is used to acquire assets such as, building, land, Machines, Equipment, etc.

 
Hire Purchase:

A hire purchase agreement is a contract in which a vendor sells an 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 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, event though the customer will posses 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 for you. When the business sell the asset, it will get a 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 the bigger portion of the asset is left for the business to invest into its operations.

Furthermore, it should be noted that, unlike a Lease (discussed above), the ownership of the property is permanently transferred to to the new owner. This is so, despite the fact that the business will still get to use the property.

 
Venture Capital Fund:

Venture capital fund is a kind of finance in which governments,  international financial institutions and donors, give monies to young but vibrant business in order to assist them to expand. Sometimes, in the case of the government, these assistance are 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 little or no interest to the business. Nevertheless, the money is supposed to be paid back to the 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 certain small businesses or business plans. They then go ahead to fund these business. Business Angels may decide later to go ahead and become shareholders of these business or not. What matters is that the monies that business angels give are donations and grants, and thus, they free.

 

Other Remarks

To conclude, I will say that Sources of Business Finance Available to a Private Limited Liability Company is a vital concept that every student, individual and business know and understand in order to assess and evaluate them to know which alternative of finance is the best suitable for your organization.

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