Financing Issues of a Business Magazine Article - Coursework Example

?Financing a Business Magazine Article Strong cash flow is the core of any flourishing small business. The recent deviation in the financial environment has affected the banks as well as the small businesses. On one hand the weakening society has put additional pressure on the small businesses and on the other hand banks are not confident enough to finance any new venture or small business. This study would be on, the effect of financial crisis on small enterprises, other modes of financing other than bank loans, and capturing the point of view of the various participants in the financing markets. The ability of a small business or firm, to access finance is of significance in order to fund the investments for the business for ensuring the growth and development of the venture. In the year 2011, the number of small businesses in the UK was found to be around 4.5 million, which indicated that around 99 percent of the businesses were small firms (Nanto, 2010). The financial crisis has made it difficult for many small firms to get funding assistance from the banks. According to the Huffington Post, around 170,000 small businesses had to close down in the USA, in the year 2008-10; out of which around 6.79 million small firms closed in 2010, and around 6.96 firms closed in 2008 (Kavoussi, 2012). The rate of self-employment diminished by 4 percent in 2007 and further by 12 percent in 2009 (Halm-Addo, 2010). A series of survey was done, which revealed that the reducing employment, sales, investment rate during 2009 and even during 2008, were affecting the small business and their performances. About 165 small firms were surveyed in the UK and it was found that around 1 in every 20 firms had doubts of their survival, and around 8 percent were forecasting deep trouble for themselves. The small businesses do not have high cash reserves or large proportion of capital assets which would be acting as collateral. So it becomes difficult for them to secure additional financing during economic crisis. Bankruptcy among the small businesses are common than the large firms because even banks do not take the guarantee of financing them during such situation (Forrest, and Yip, 2011). The current economic crisis has created major liquidity issues in the banks, which in turn has influenced the lending practices. Bank of England has reported that financial crisis has observed the weakest flow of funds to the small businesses in the UK. The demand for secured and unsecured lending has increased in the UK since 2009, but it has been noticed that the changing policies of the banks due to rising risk of bankruptcy and insolvency, has limited the supply of funds. Evidences have been accumulated that the small enterprises in UK have faced difficulties in accessing funds during the period of 2008-09. According to the Forum of Private Business Reports, poor flow of cash and late payments were the major issues that the Economic Downturn Panel has referred to. They have also highlighted that these were mainly due to the slow decision-making, lack of any sales activity, and the increasing cost of lending rates. It was found in June 2009, that in the UK, about 33 percent of the small businesses could not access financial aid from banks, and around 44 percent of the small firms had to face immense difficulty to receive financial assiatnce. All the above statistics reveal that it is indeed difficult to raise money in the present economic climate. This is the reason why other ways of financing need have to be evaluated, so that small businesses do not close down just because of not getting access to bank loans (Stokes, and Wilson, 2010). The alternative sources of funding are discussed below: Merchant Cash Advances: In this type of financing the lender does not lend money on equated monthly installment (EMI) basis, but they are interested in the sale and purchase of credit card income of the future. So they collect a fixed percentage of the credit card income daily, until the loan is repaid (Department of Business Innovation & Skill, 2012). Peer to Peer Financing: This lending transaction is similar to any online business like eBay, in which the requirement of funds are posted by the firms on the lending websites, along with the maximum amount of interest one is willing to pay. The potential lenders offer the loan when they are satisfied with the interest rates. The company receiving the loan must also have a good credit rating or score. Credit Cards as a Source of Financing: Though raising money for small businesses through credit card financing is not the most favorable method, it can assist a small firm to continue its operation for some time. The payments have to be made on time, and the firm has to negotiate to get the lowest possible rate of interest from the credit card company. Inventory Financing: The inventory of the small firm can be utilized as collateral, to fulfill working capital requirements from financers. Inventory financing assist in offering valuable sources for funds or capital, for those businesses whose products are sold at high prices, and they are not easily movable. So, as the inventory gets sold off, lenders get repaid accordingly (Food and Agricultural Corporation, n. d.). Finance Companies: There are many small financing companies which offer short-term loans to the small firms. However, these companies charge higher interest than the banks and also have high processing fees. Moreover, these companies are generally loosely regulated and small firm owners have to be extremely careful while getting into lending contracts with such companies. Venture Capital: The venture capital provides financial assistance to the small firms who reveal potential of high growth or high profitability. The venture capital firms have made about $21.2 billion investment in the year 2009, according to Pricewaterhouse Coopers. However, venture capital financing cannot be achieved for those businesses which do not reveal a prospect of high growth in the future. Credit Unions: Due to the banking crisis in the present economic situation, about 7800 credit unions have cropped up around the world. Among 7800 credit unions about 2000 of them have already provided loans to the small businesses. Credit unions are the non-profit making organizations, so they offer better terms and conditions to the firms than the commercial banks (Department for Business, Innovation and Skills, 2012). Unsecured Credit: The small businesses can acquire lines of credit from the unsecured financing companies. There are about 700 companies providing unsecured credit for those borrowers who have the capability to face high risks. Funding from Individual Retirement Accounts (IRA): There are a few companies who seek help from the IRA for funding. These are generally the very small business owners who turn to their retirement savings for saving their business. In this type of financing, the borrower or firms would not bear any debt or interest because it’s the owners own money. However, it is advisable that if there is probability of growth and recovery in future, only then this source of financing should be opted for. Cash: The small businesses, who cannot receive credit facilities from the banks due to high cost of lending, can opt for the business saving account, which would support in lending funds for the business. Generally, small companies off-set a fixed amount of fund every month for contingency plans, so those cash can be utilized for financing the businesses (America’s debt Help Organization, 2013). Small Business Administration Loans: In the year 2011, the level of administration loans for small businesses have reached to its highest. About 61,689 credits were backed by the administrative loans, which amounted to $30.5 billion; it reveals a huge leap from just 50,830 loans of $17.9 billion two years back. This is because the banks are not allowing loans to the small businesses due to the fear of bad debt. Asset-Backed Financing: As the name suggests the asset backed loans are provided in exchange of collaterals. Though this is more expensive than the normal bank loans, small businesses generally move towards these forms of financing when they do not have proper track records to reveal their credit lines Government Grants: Government of all the countries have come up with various micro-finance schemes for the small businesses, so that they can receive financial assistance at a reasonable rate of interest. Apart from this, various other financing schemes have been developed, so that small firms do not get exploited in the hands of the money lenders during the turbulent economic situation (Clifford, 2012). After a comprehensive analysis regarding the sources of financing that small businesses or firms can receive, it is important to analyse the financial information that the finance providers seek from the small businesses or firms in order to offer them loans. The major loan providers are the banks, venture capitalists, financing companies, micro-finance institutions and the government of the country (Seng, 2009). Majority of the money lenders or finance houses such as banks or financial institutions request for the personal information of the business owner at first. They initially require the residential address, personal status like married or single, etc, educational background, and professional history. Other things such as criminal records and issues of dispute with other financers are also thoroughly verified. However, this information is of secondary importance (McCahon, 2009). The major information that banks or other financial institutions mainly look for is the financial information. The financial paperwork should reveal the favorable skills of the firm, which would assist the firm to fulfill its liabilities towards the lender. The credit reports of the small business have to be from the eminent credit agencies, so that it can be easily trusted, and if any inaccuracy is found, then the agency can be immediately contacted. So banks and other financers too want their own copies of credit history of the small firm, whom they lend money to (Yazdipour, 2011). The documents such as income tax returns of the company and of the owner and bank statements for a time span of three to five years need to be presented. If the venture is new then the business plan consisting of the detail financial, marketing, operation, and feasibility analysis should be presented to the financer. In case of existing enterprises, the financial statements of the company or (its) books of accounts reveal the financial performance of the firm so far (T. Tracy, and J. Tracy, 2011). The licenses and legal framework of the firm is also thoroughly checked, so as to check the legality of the establishment. Apart from this the processing fees and interest rates of the financers vary, based on the type of financing. However, the above mentioned information is the primary requirements of finance lending company (Longenecker, Petty, Palich, and Hoy, 2011). References America’s debt Help Organization, 2013. Sources of Financing for Small Business. [online] Available at: < http://www.debt.org/small-business/sources-financing/> [Accessed 25 January 2013]. Clifford, C., 2012. The State of Small Business. Entrepreneur. [online] 3 January. Available at: < http://www.entrepreneur.com/article/222540> [Accessed 25 January 2013]. Department for Business, Innovation and Skills, 2012. Boosting Finance Options for Business. [online] Available at: < https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/32230/12-668-boosting-finance-options-for-business.pdf> [Accessed 25 January 2013]. Department of Business Innovation & Skill, 2012. SME Access to External Finance. [online] Available at: < https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/32263/12-539-sme-access-external-finance.pdf> [Accessed 25 January 2013]. Food and Agricultural Corporation, no date. Sources of Finance. [online] Available at: < http://www.fao.org/docrep/W4343E/w4343e08.htm> [Accessed 25 January 2013]. Forrest, R., and Yip, N. M., 2011. Housing Markets and the Global Financial Crisis: The Uneven Impact on Households. Massachusette: Edward Elgar Publishing. Halm-Addo, A., 2010. The 2008 Financial Crisis: The Death of an Ideology. Pennsylvania: Dorrance Publishing. Kavoussi, B., 2012. Recession Killed 170,000 Small Businesses between 2008 and 2010: Report. The Huffington Post, [online] 25 July. Available at: [Accessed 25 January 2013]. Longenecker, J. G., Petty, J. W., Palich, L. E., and Hoy, F., 2011. Small Business Management: Launching & Growing Entrepreneurial Ventures. 16th ed. Connecticut: Cengage Learning. McCahon, C. K., 2009. Plan, Finance and Start Your Business Right Now! San Fransisco, CA: Sample Plan Inc. Nanto, D. K., 2010. Global Financial Crisis: Analysis and Policy Implications. Darby: DIANE Publishing. Seng, R. E., 2009. How to Buy a Small Business and Let the Government Finance It. Bloomington, IN: Author House. Stokes, D., and Wilson, N., 2010. Small Business Management and Entrepreneurship. 6th ed. Connecticut: Cengage Learning EMEA. Tracy, T. C., and Tracy, J. A., 2011. Small Business Financial Management Kit for Dummies. New Jersey: John Wiley & Sons. Yazdipour, R., 2011. Advances in Entrepreneurial Finance. London: Springer. Read More