STUDENT NAME: CHIDHAU CASTON STUDENT NO: 2315027F

COURSE TITLE: ENTRPRENEURSHIP AND FINANCIAL MANAGEMENT COURSE CODE: PST1168

LECTURER:MR MOYO

COURSE NAME: ENTREPRENEURSHIP AND FINANCIAL MANAGEMENT DATE:05-11-23

QUESTION:

DISCUSS ANY FIVE SOURCES OF FINANCE FOR BUSINESS ORGANISATIONS CITING THE ADVANTAGES
AND DISAVANTAGES OF EACH.

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Finance is a study that deals with investments. It includes the dynamics of assets and liabilities
over time under conditions of different degrees of uncertainties and risks. Finance can also be
defined as the science of money management. It is the livelihood of business concern, because
it is interlinked with all activities performed by the business concern. Financial requirement of
the business differs from company to company and the nature of the requirements on the basis
of terms or period of financial requirement, either long term or short term. Financial
requirememnts.Sources of finance are the provision of finance to an organization to fulfil its
requirement for short term working capital and fixed assets and other investments in the long
term as well as fulfilling the company’s obligations.. Securing finances for a business startup or
expanding an existing operation is a challenge for any business. Businesses aim to maximize
their financial gains but they need financial capital to operate, This includes short term working
capital, fixed assets, owner’s investment, personal savings, retained profits, debentures, loans,
hire purchase, venture capital, grants and invoice discounting. Sourcing money can be done for
a variety of reasons, namely capital asset acquirement, new machinery or the construction of a
new building. Normally big developments are financed internally, whereas capital for the
acquisition of machinery need to come from external sources. In this day and age of tight
liquidity, many organizations have to look for short term capital in the way of overdraft or loans
in order to provide a cash flow cushion. The five main sources which shall be of main focus are :
Bootstrapping
Bootstrapping is founding and running a company using only personal finances or operating
revenue. This form of financing allows one to maintain and control the affairs of a company, but
also can increase financial strain. Owners can bootstrap by cutting costs, personally financing
operations, cutting back operations, or looking for other creative short term financing solutions.
A bootstrapped company may take preorders for its product, thereby using the funds
generated from the orders actually to build and deliver the product itself. This kind of funding is
good in that it allows the owner to maintain control over all decisions. A common source of
funding for a new or expanding partnership is the pockets of an individual or partners. One has
to consider how much financial resources can be put towards business, Sources can include
savings, stocks and bonds, or even retirement funds. Bootstrapping can also mean asking from
those around family and friends. There is however an advantage of fast access, but there is also
a risk of jeopardizing a personal relationship.
Bootstrapping ,like all sources of financing has its pros and cons, On the positive side, using
your own cash means there are no strings attached, no interest accruing, and no repayment
schedule. Personal finance is the fastest way to secure findings.
Conversely using your own money as a major investment in your business means putting your
personal finances at risk. You could lose your savings entirely and if you have dipped into your
retirement account, you may put your future plans at risk and your business partners.

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Furthermore bootstrapping may not provide enough investment for the company to become
successful at a reasonable rate. Sometimes it may not be financially feasible to bootstrap a
company that requires high upfront capital investments to form. Some businesses may also
have a slower turnaround of inventory, meaning bootstrapped cash may be tied up for a longer
period of time. The owner must always decide upfront how the revenue is used either to
channel for growth, because the funds should not be extracted too soon from the company
revolving funds. This may leave both the company and owner at risk. Sometimes depending on
the industry and business the owner must supply capital at various stages. During the early days
of the company. The owner can also decide to take personal loans if there is no enough capital.
Because bootstrapping results in personal debt, the owner is personally liable for debt and may
have personal assets seized should he go bankrupt and default on the loan. During the time
when the company will be starting, the owner may bootstrap by limiting what the company
spends. He/she can do this by delivering goods to customers himself or herself instead of
paying extra services for delivery. Sometimes a company can only manufacture items upon a
paid order. It may sell to a specific geographical area due to shipping constraints or sell specific
goods for defined period of time until it has the capital to sell additional, more profitable but
more expensive to manufacture goods.
Bootstrapping however increases financial risks to the company since it may not be able to
cover emergency or unexpected costs. It also requires a company to operate with limited
resources since the limited funds are sourced from the owner. There also possibilities of
creating a negative view from the customers, suppliers and investors
Personal savings
This is the first place a business owner should look for money and is the most common equity
capital for starting a business.This is the amount of money an owner partner, or shareholder of
a business has at his disposal to do whatever he wants. When a business seeks to borrow the
personal money of a shareholder, partner or owner for a business’s financial needs,the source
of finance is personal savings.Outside investors and lenders expect company owners to put
some of their own capital into the business before investing theirs.
The advantages is that the owner would not want collateral to lend money to the business and
owner on time. Personal savings can also be interest free since it will be the owner who will be
providing the loan.
However personal savings is not a good option where very large sums of funds are required. If it
so happens that the shareholder or owner demands his money back immediately it might
create cash flow problems for the business.
Sale Of Fixed Assets
An asset sell happens when a business organization sells some of its property it owns to
another party, company, government or individual. Fixed assets are the assets a company has

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like buildings, land, vehicles, fixtures and some machinery. Sometimes where the fixed asset is a
surplus and is abandoned, it can be sold to raise finance in demanding times for business. This
can be done to raise funds for funding new projects. However in selling assets, there might be a
situation where the full value of the assets might not be realized or they might be needed in
future. Buying them back after selling might become very expensive. The sale of fixed assets is
an internal source of finance and its advantages are that it let the business sustain complete
control. When the business is utilizing its internal source of finance, then it does not have any
repayment obligations. There is no pressure to match the payment roster to the earnings
roster. The planning process is enhanced since there is no pressure in wanting to fulfill the
obligations of paying a debt. A business is more cautious with the use of internal finance when
planning a project than in comparison to external finance. There is no misapprehension that the
business has the cash to spare while using internal sources of finance. This means that there is
less spending on unessential things and this presents a positive outlook over a period of time.
The other advantage of selling fixed assets to create internal source of finance is that it lowers
the overall cost of projects. External sources of finance pay interest which makes it expensive to
borrow. Internal source means they purchase a product without having to pay interest charges.
This also improves the reputation of the business.
However some of the disadvantages of internal sources of finance are that since the business is
using its utilizing internal sources to finance its needs that money should come from
somewhere. This means using cash from operating budget. Most businesses do not have funds
available for managing daily expenses. Hence there will be an adverse effect on the operating
budget. The other disadvantage is that if the assets being sold have depreciated in value, that
would mean the company would sell the assets at a loss.
The other disadvantage is that, if there is a project to be financed there must be a need for
accurate estimations to be effective. Precise estimates are needed in order to calculate the
forecasted return, which is essential for future needs to plan a budget. With external funding
the business will immediately get all the funding needed for the project and allow it to start the
work right away. Internal financing, access to money can at times be slow. The business might
have to create funding levels prior to starting a project.
Bank Lending
Borrowing from the bank is another important source of finance. It is easy and quick to access
and also can get quite a large sum of money at one time. The bank normally would want to see
a business plan and financial forecast. A thorough evaluation of the organization’s financials
and forthcoming plans is done by the bank to assess the debt serving capability of the business.
Such loans are assured by the business. The disadvantage is that one has to pay interest and in
most cases for a new business it is difficult to access the loan. Some loans acquired from the
bank require collateral in case the money is not paid back. A bank can also offer a bank
overdraft which can be a short term finance. At times a business may require money for daily
expenses which may be because of a time gap during the collection and payments. To fill the
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gap, a bank overdraft loan will suffice as a short term source of financing. External financing
especially from the bank permits the business to utilize the internal financial resources for
some other usage. If a business has an investment that has a high interest rate in comparison to
the bank loan, then it is better that the business preserves its internal resources and places its
money in that investment. External sources of finance can be used for business operations. The
other reason why businesses go for external financing is that it permits them to finance growth
projects that the business cannot finance on its own. Bank institutions are also considered to be
very valuable sources of expertise.
The main other disadvantages of external sources of finance is the chances of losing ownership
because of their funding. The business may get a large amount of money it needs to launch or
promote a new product but will also have to give the investor this right to vote on the
company’s decisions. Typically since a bank will have interest charge on the loan and an
investor also requiring return on investment, this would mean interest will add up to the cost of
investment making it a greater burden than in the initial plan.
Venture Capitalist and Business Angels
Venture capitalists are looking for technology driven businesses and companies with high
growth potential in sectors such as information technology, communications and
biotechnology. They take an equity position in the company to help it carry a promising but
higher risk project. This involves giving up some ownership or equity in the business to an
external party. Venture capitalist also expect a healthy return on their investment, often
generated when the business starts selling shares to the public. It is also important to have
venture capitalists who bring about experience and knowledge to the business. They also
normally get involved in starts-up with potential growth rate. Preferring to focus on major
interventions when a company needs a large amount of financing to get established in its
market. Venture capital firms usually do not want to participate in the initial financing of a
business unless the company has management with proven track record.
Angels are generally wealthy individuals or retired company executives who invest directly in
small firms owned by others. They are not only leaders in their own field who not only
contribute their experience and network of contacts but also their technical and management
knowledge. Institutional venture capitalists prefer to invest large amounts of funds in
companies risking their funds. They expect to make a profit and usually have business expertise
they share with the company leaders to help the company to grow. They may also scrutinize
the business plan before they go ahead and invest. To protect their investments they offer to
supervise the company’s management practices. This often involves a seat on the board of
directors and some assurance on transparency. Business plans are subjected to an extremely
rigorous review and very few companies succeed to get this kind of funding. Most venture
capitalist seek investments of higher values. They also look for organizations that show growth
and have a competitive edge with competent management.

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