3 Unit 7 Sources of financing for new small firms
The capital of a business consists of those funds used to start and run the business. The funds may be either the owner's (equity capital1) or creditor's (debt capital2). Capital is also classified, depending on its use, as fixed or working.
Fixed capital3 refers to items bought once and used for a long period of time. These items include real estate, fixtures, and equipment.
Working capital refers to the funds used to keep a business working or operating. It pays for merchandise, inventory, and operating expenses such as rent, utilities (light and heat), taxes, and wages. Cash on hand and accounts receivable4 are also considered working capital. Therefore, working capital is cash, or anything that can be easily and quickly turned into cash.
No firm should ever be started without a clear and positive understanding of where its total capital needs are coming from. The various types of financing available to business firms are usually classified as: 1. Short-term capital. This is borrowed capital5 that is to be repaid within one year. 2. Intermediate capital. This is borrowed capital that is to be repaid in one to five years. 3. Long-term capital. This is capital whose repayment is arranged for more than five years in the future.
SOURCES6 OF FUNDS FOR SMALL FIRMS: Equity capital. Personal funds — saved or inherited7. Loans from relatives and friends. Commercial bank loans8. Mortgage loans9. The Small Business Administration. Venture10 capitalists.
EQUITY CAPITAL consists of those funds provided to the business by the owner(s). These funds come from the personal savings11 of the small business entrepreneur. If the entrepreneur decides to obtain more funds through equity sources, it can be done by having partners or selling stock. When these sources are used, however, the small business entrepreneur gives up some ownership control of the business and shares the profits.
PERSONAL FUNDS. Whenever potential creditors, partners, or stockholders are invited to invest in or lend financial assistance to a new firm, their first question is, "How much does the owner have invested?" Every business contains an element of risk, and outsiders who invest in a new firm wish to be sure that such risk is shared by the owner. It is important that the would-be owners12 have assets of their own to invest in the firm. The closer they are to 50 percent of the total capital needs that can be provided, the greater will be their independence and share of net profits.
LOANS FROM RELATIVES AND FRIENDS. Many new owners are encouraged13 in their enterprise by parents, relatives, or friends who offer to supply loans to the firm to get it started. The best way to avoid subsequent14 problems is to make sure that loans are made on a businesslike basis. They should be viewed as business dealings15. The right of the owner to make decisions should be respected by all parties involved.
COMMERCIAL BANK LOANS. The commercial bank is one of the main sources of short-term loans. Commercial bank loans are usually for short periods of time (less than one year), but many banks lend money for longer periods. The interest on a commercial bank loan is higher than many other sources. The business owner should establish a credit line with a commercial bank. A credit line means that the bank agrees to lend16 the business owner an amount of money, to a stated maximum, at any time.
MORTGAGE LOANS. If the new firm planners own a commercial building, they can usually secure a mortgage17 on it with payments over as many as 30 years. It may be the building in which the new firm operates. In that case, the planners will be making mortgage payments instead of rental payments18 to a landlord.
The SMALL BUSINESS ADMINISTRATION is a US government agency organized to aid19 small business in many ways. This agency offers small businesses financial aid in the form of guaranteed loans and advice about where financial aid can be obtained. The SBA also offers educational aids and consulting services.
VENTURE CAPITALISTS. This is a term used to refer20 to individuals or corporations which invest long-term equity and debt capital in promising start-up and growing businesses. Venture capitalists usually take some equity (ownership) in the firms for which they provide funding. Many venture capitalists only invest in firms that need $100,000 or more financing.
Notes: 1. капитал в форме акций; 2. привлечённый капитал; 3. основной капитал; 4. счета дебиторов; дебиторы по расчётам; дебиторская задолженность; 5. заёмный капитал; 6. источник; 7. наследовать; унаследовать; 8. ссуда коммерческого банка; 9. ссуда под недвижимость; 10. рисковать; рискованное предприятие или начинание; 11. сбережения; накопления; 12. предполагаемый владелец; 13. поддерживать, поощрять; 14. последующий; 15. коммерческие сделки; 16. ссужать, давать взаймы; 17. получать ссуду под залог; 18. арендная плата; 19. помогать; помощь; 20. ссылаться, указывать.