SOURCES OF FUNDING
EQUITY FINANCING
DEBT FINANCING (LOANS, VENTURE FUNDING, ANGEL FUNDING)
GRANTS
GIFTS
BEQUESTS
Sources of funding can be easily classified as either equity financing (where the financier takes a
share in the ownership and control of the business) or debt financing (where the financier must be
repaid the amount along with interest).
Internal sources of finance includes, sale of fixed assets, retained profits (earnings) and working
capital.
External sources of finance includes, issue of shares, bank loans and overdrafts, debentures, venture
capital and government assistance.
In some instances, firms may benefit from other special funding in the form of grants, gifts and
bequest.
Debt Financing – When companies Borrow from lending institutions, they take on loans (which
are a form of debt), which they repay over time with added interest. Trade Credit is also a form of
debt financing where businesses are allowed to buy supplies and stock on credit, to be repaid at a
later date often within the short term.
Loans - one of the simplest forms of debt and probably the first thing that comes to mind when you
think of this kind of funding.
Venture – venture capital refers to the funds invested, or that are made available for investment, in
a business that offers favourable returns. Using venture capital may provide businesses with more
funds for start-up, as wealthy individuals (venture capitalists) normally pool funds which they use
for investment in business ventures.
Angel - Angel funding is the practice of high-net-worth individuals investing their own time and
money in new businesses with the goal of profiting from their long-term growth. Such investments
are characterized by very high levels of risk as most companies are in the earliest stages and will
likely fail. Angel investors are different from venture capitalists (VCs) in that VCs invest other
people’s money. Motivations are another important distinction between the two; angels are typically
interested in more than just receiving a financial return. Personal interest, the desire to give back,
and the thrill of being involved with an innovative company are just a few of the reasons why
people decide to become angel investors.
Equity Financing – refers to funds that are raised by a business in exchange for ownership in the
company. Often raised by issuing shares in the company. Unlike debt financing which must be
repaid over time, equity financing does not have to be repaid. Equity also comes in the form of
direct capital investment. There is no need for collateral.
The disadvantage with equity financing is that it takes away from the entrepreneurs ownership and
control of the firm.
Grants –There are lots of grants out there, and many of them are ideal start-ups especially if your
business is very innovative or specific. This is free money – you do not have to pay a grant back.
Grants are especially good for businesses in niche industries, where there’s often less competition
for the money. However, grant proposals can take a long time to put together, there can be quite a
lot of competition, and the money has to be used for a specific purpose. It is rare that a grant can
fund the business alone you’ll usually be expected to match at least part of the funding with your
own finance.
Gifts – the transfer of assets or valuables without any obligation to reciprocate (to do the same
thing). These gifts help with the daily operations of the business and its expansions. Many countries
offer gifts and grants to small business owners as a means of stimulating economic growth in the
economy.
Bequests – Any gifts that is received as a result of the reading of a Will. Bequests that are
substantial are a good source of capital for a business. The receiver must ensure that all transfer
documents have been prepared and handed to the relevant persons and all taxes have been paid.
