Sources of finance for the Small and Medium Enterprises

Finding the right source of financing that fits with business goals is a continuing challenge for almost every small business. Sources of finances for small and medium enterprise can be categorized into two types;

Internal sources /equity financing
External sources/ debt financing

i) Internal Sources of finance

This is the owner’s contribution to a business and is made up of permanently invested capital and reinvested profits. Internal source of finance is also referred to as equity financing which means the money invested in the venture with no legal obligation for an entrepreneur to repay the principal amount or pay interest on it.

Also read: How to Become an Entrepreneur: Tips & Guide

Types of Equity Financing

Personal savings
Partners contributions
Retained earnings
Corporations( sell of shares)

Advantages of Equity financing

No repayment in the form of debt
It is much safer for new ventures than debt financing
An entrepreneur can enjoy valuable business assistance from the angel investors

Disadvantages of Equity financing

It requires shared ownership and profits
limited capital for venture start-ups
limited development and growth of a venture(shared decision making slow down its growth)
It can lead to delayed establishment or operation of a venture.

Also read: How to create a Business plan

ii) Debt financing

It refers to the short term and long term borrowings that can be used to finance the enterprise. Short term borrowings can be of one or less than one year, and long term borrowing can be of 1 to 5 years or more.

The most common sources of finance are Bank borrowings. But there are other forms of debt financing which includes;

Bank borrowings
Borrowing from friends and relatives
Leasing loan stock/credit facilities
Hire purchase

Advantages of Debt financing

No shared ownership and profits
Facilitate fast venture growth and development as more borrowing allows for potentially greater profits
During the period of low-interest rates, the opportunity cost of borrowing is justified since the cost of borrowing is low.

Disadvantages of Debt Financing