There are basically two types of finances. Some are obtained internally while the rest constitutes those that are externally sourced. Internal sources of finance refer to the finances that are generated from revenues that come from internal business operations. This revenue which is also known as retained profits is produced as a result of previous sales above normal cost of goods produced (Rudman, 1999). The business owner may choose to pump in the profits back to the business expecting to increase the capital base of the business as a whole. This form of financing is usually the best mode of any particular small business development but since most of these small businesses make little or no profits at all, it then becomes obvious that they will definitely need other forms of finance that are completely independent from the business.
These funds sources which come from completely different independent avenues refer to as external finances. This form of finance is the most sought after kind of finance especially when the business is in dire need of expanding its operations. Basically there are two types of external kind of finances which include either debt or equity finance. In debt financing, the business actually takes bank loans which it will then repay within a given period of time (Snell, 2003). The sum of money repaid to the lender (bank) is usually bigger than the initially borrowed amount. This extra amount of money that is paid to the lender in excess is referred to as interest and is usually calculated using certain percentages over periods of time. In equity form of financing, the business owner decides to get extra funding by means of reducing their ownership percentage so that the other partner owns part of the business.
Unlike debt financing, equity financing does not require any form of security before accessing the funds provided the business qualifies to be listed in the stock exchange program. There are other types of external financing which ranges from money borrowed from friends and family members, government guaranteed loans and corporate venture capitals.
Since Custom Stitches is entirely a small form of business, which has the desire to expand its operations, it will, therefore, be wise to narrow the sources of finances which will be of beneficial use to it.
The first source of finance is bank loans. Andy may as well decide to get commercial bank loans and either specify them to business or consumer loans. The reason for opting for a bank loan is due to the fact that the loan can easily be accessed provided there are personal or company assets that will act as security at the same time. For business loans, lenders will always demand personal guarantees and so Andy should be well versed with this in case he needs this type of funding. The other thing the bank will request for this loan is a collateral, the reason being that the bank wants to really comprehend whether the project to be handled is worth taking a risk (Snell, 2003).
The major advantage with bank loans is the fact that they have a high leverage return and can easily be accessed if the borrower, which in this case is Andy, possesses worthy company assets that will be used for security purposes. The major disadvantage with bank loans, especially business loans, is the fact that the bank may demand the borrower to come up with the full amount lend in case it is suspected that the business is facing hard financial times. Another disadvantage with bank loans is that they usually come with high interest rates and repayment of these may thus be costly to Custom Stitches.
The second source of finance for Custom Stitches is government guaranteed loans. This type of loans is basically concerned with small businesses that are in need of expansion support. The Small Business Administration (SBA) acts as the main guarantor on loans for this small business. However, Custom Stitches will have to work hard if they are going to conduct business with lenders who partner with SBA to make the project a success altogether. The funds provided by SBA are usually not meant for other purposes rather than developing (expanding) the small businesses in hand. The restrictions put forth for small businesses, which aspire to access the funding, are that the businesses must meet the stipulated size limits that have been set by the SBA. The business must also be meant to make profit and, lastly, the business must be owned and operated independently (Peters& Waterman, 2002). The major advantage with this form of financing is the fact that it is easily accessible, provided the business meets the selection criteria. It is also less costly in comparison to bank loans in the sense that the government subsidizes the interest rates to be paid as a way of encouraging growth and development in the business sector. The major disadvantage with this type of funding is the fact that it can be somewhat difficult to access especially when the business does not qualify for the loan.
The third and the last kind of financing for Custom Stitches to consider is the one that is obtained from family members and friends. When funds are obtained from close relatives and friends, there is usually little or no interest to be paid for it. Therefore, the funds can be invested without any restrictions. However, it is predetermined that before receiving this kind of finances the business must first compose an agreement indicating when and how the funds will be repaid to them (Rudman, 1999). The major advantage of this form of financing is that it is cheap and does not require filling of complex paperwork. The major disadvantage is that the family members and friends may decide to mix business with pleasure so that business operations are affected negatively.
In conclusion, I think that Custom Stitches should go for either one of these three methods or rather combine them in case they are easily accessible. But, in case government loans and money from relatives and friends prove to be a challenge, then bank loans will be the best option to consider, since it is formal and can be easily accessed.