SOURCES OF FINANCE OF A LIMITED COMPANY

Limited companies attain their finances from myriad sources and what is ideal for one company might not work for another. In deciding on where to source finances, a limited company has to carry out a careful analysis of its needs and — as noted by The Mill Consultancy — the amount of risk involved and how much equity it is willing to give up.

A limited liability company (LLC): is a type of business ownership combining several features of corporation and partnership structures. Is not a corporation or a partnership. May be called a limited liability corporation, the correct terminology is limited liability Company. Owners are called members not partners or shareholders. Numbers of members are unlimited and may be individuals, corporations, or other LLC’s A limited liability company is a corporate structure whereby the members cannot be held personally liable for the company’s liabilities or debts. The laws that govern vary in different jurisdictions. It is similar to a corporation in some respects but not all. If you are interested in forming an LLC you should consult with an attorney who specializes in business law. In general, limited liability is a type of liability that cannot exceed the amount that has been invested in a partnership or limited liability company.

 

Sources of Finance of a Limited Company

Commercial Loans

One option that you may want to pursue is a commercial loan. When you start an LLC, your business will likely not have any business credit. In this situation, you may be required to use your own credit history to qualify for the loan. Working with a lender that offers loans backed by the Small Business Administration is typically one of the best routes to obtain a commercial loan. These loans are essentially backed by the federal government, which means that it is easier to qualify for financing.

Private Investors

Another way that you can raise money for your LLC is through private investors. Private investors, such as angel investors or venture capitalists, can potentially provide you with the money you need to get started. These individuals will want to take a position of ownership in your company in exchange for their investment. If you have a new idea that could be profitable, there are a number of angel investors in the market who may be willing to provide you with funding. One of the nice features of going this route is that you do not have to pay back the money according to specific terms as you would with a loan.

Personal Loans

Another way that you may be able to secure financing for your new LLC is through personal loans. This means that you will get a loan that is unrelated to your business and then simply use the funds for business purposes. For example, you could use a home-equity loan to get access to the money you need. If your credit is good enough, you might be able to get a personal loan that does not require any collateral. While this can get you the money you need, it is also risky because your personal assets or credit is tied to the success of your business.

In some cases, you may be able to access lines of credit to help get your new business off the ground. For example, you could use personal credit cards to purchase the supplies and items that you need to get started. In some cases, you might be able to open up a credit card in your business name to limit the amount of personal liability associated with the debt. You may also be able to open up credit lines with suppliers so that you can buy your supplies on credit.

Short Term and Internal Sources

Most start-ups finance their business from the personal savings of shareholders. Other internal sources of finance include loans and grants from family and friends. When the business is expanding and shows signs of profitability, earned profits are reinvested into the business instead of distributing them among shareholders. Company assets not critical to the business could be disposed of and the earnings could be used to finance company operations.

Banks

Banks provide a ready external source of finance for limited companies. Finance from financial institutions can take the form of loans or overdrafts. For most start-ups, an overdraft is preferred to a loan as the former provides for flexible terms of payment and does not tie the company to the lender for a long period. Moreover, an overdraft does not require collateral — which is the case with most long term loans. While an overdraft is flexible and can be paid off quickly, it is more expensive than a long-term loan; the company therefore needs to carefully assess its cash-flow situation before deciding on this matter.

Other External Sources

A limited company can obtain funds by issue of shares to a third party. While this improves the company’s balance sheet, it has the drawback of limiting the influence of the original shareholders’ influence on the running of the company. Similar to the issue of shares is acquisition of funds from venture-capital organisations. Venture-capital houses are able to inject huge amounts of money into a company but — as when new shares are issued — they play a controlling role in the management of the business and could require a seat on the company’s board. On the plus side, providers of venture capital bring with them years of expertise in business management and will ultimately help strengthen the company. Most venture-capital houses, however, will only work with well-established companies and might not be ideal for start-ups.

 

Conclusion

The sources of short term finance are: Bank Over drafts Bank overdrafts are a short term medium of financing that fulfills the contingency needs of the business especially for the adjustments in the fluctuations of cash flow and sudden demands.

Finance is a field that deals with the study of investments. It includes the dynamics of assets and liabilities over time under conditions of different degrees of uncertainty and risk. Finance can also be defined as the science of money management. A key point in finance is the time value of money, which states that purchasing power of one unit of currency, can vary over time.

Reference

The Mill Consultancy: Sources of Finance

Prime Chartered Accountants: Sources of Business Finance

Biz/ed: Introduction – Sources of Finance