➢ The way this works is simple. The entrepreneur takes out a second or larger mortgage on a private property and then invests some or all of this money into the business. ➢ The use of mortgaging like this provides access to relatively low-cost finance, although the risk is that, if the business fails, then the property will be lost too.
Personal sources b. Borrowing from friends and family: This is also common. Friends and family who are supportive of the business idea provide money either directly to the entrepreneur or into the business. ➢ This can be quicker and cheaper to arrange (certainly compared with a standard bank loan) and the interest and repayment terms may be more flexible than a bank loan. ➢ However, borrowing in this way can add to the stress faced by an entrepreneur, particularly if the business gets into difficulties.
Personal sources c. Credit cards: This is a surprisingly popular way of financing a start-up or small business. In fact, the use of credit cards is the most common source of finance amongst small businesses. ➢ It works like this. Each month, the entrepreneur pays for various business-related expenses on a credit card. 15 days later the credit card statement is sent in the post and the balance is paid by the business within the credit-free period. ➢ The effect is that the business gets access to a free credit period of around 30-45 days!
Internal sources 2. Retained profits : This is the cash that is generated by the business when it trades profitably – another important source of finance for any business, large or small. ➢ Note that retained profits can generate cash the moment trading has begun. For example, a start-up or small business sells the first batch of stock for GHs 5,000 cash which it had bought for GHs 2,000. ➢ That means that retained profit is GHs 3,000 which can be used to finance further expansion or to pay for other trading costs and expenses. 3. Share capital invested by the founder : The founding entrepreneur(s) may decide to invest in the share capital of a company, founded for the purpose of forming the start-up. ➢ This is a common method of financing a start-up. The founder provides all the share capital of the company, retaining 100% control over the business.
External sources ▪ Loan capital: This can take several forms, but the most common are a bank loan or bank overdraft. 1. Bank loan provides a longer-term kind of finance for a start-up or small business, with the bank stating the fixed period over which the loan is provided (e.g. 5 years), the rate of interest and the timing and amount of repayments.
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