Introduction
The era of business development and service improvement means that organizations must work within the limits of tight liquidity to meet the profit maximization objectives. This means that organizations must focus more on short term capital, which could be an overdraft or loan with an aim of cushioning cash flows. While considering the available sources of funds for business and service industry, there is need to understand that the lending institutions or individuals may alter interest rates to meet their own profit objectives (Whittle 2010). This paper analyses the various sources of funds for a sole trader, and based on the advantages and disadvantages of each source, the most appropriate source of fund is selected to fulfil the businesses criterion presented for the case scenario.
Response to the scenario
A sole manager running a small business with an initial capital requirement of £50,000 may outsource funds from one of the following alternative sources: Personal sources, Banks and finance companies, Business investors, Grants from government and private sector, Capital markets through new share issues or right issues, Operating through loan stock, Operating through venture capital, or Franchising.
Personal funding
Personal sources of funds otherwise known as bootstrapping allow entrepreneurs to grow without focusing on the external sources of funds. The decision to consider bootstrapping in the scenario presented will enable the sole manager to limit financiers’ control over the business operations and the possibilities of grabbing a disproportionate portion of the business wealth or revenues (Whittle 2010).
The sole manager for the small business can consider working through personal savings, loans from family and friends, or using the existing personal borrowings. Most lending institutions and individuals require well written business plans before accepting to release funds for the business. At times the fund requests may be declined, especially if the plan is not well understood by the financer. This implies that owner’s funding remains the only sure and realistic approach towards run the business.
Personal financing is advantageous for a sole trader because it limits the possibility of falling in the liquidity trap. The sole trader is the controller of all the finances and revenues, which he or she can use to expand the business instead of meeting the profit objectives of a third party like a bank or an investors. The sole trader engaging in personal financing also prevents uncertainties that may result from failures on the side of financers to meet the funding request (Newman 2007). In other words, the sole manager is certain that the finds to run the business are available and adequately determined, and if there is any shortcoming, appropriate source of funds can be sought. However, it may be hard for the sole trader to meet the initial capital requirement presented in the scenario and this would mean seeking for the most appropriate funding.
The first shortcoming of personal financing retails around the fact that the sole manager may not be in a position to meet all the funding requirements due to limited financial capabilities. There will be need for the business manager to limit his or her budgeting and this means that the financial objective of the business will not be fully met (Newman 2007). Other than the financial constraints, which is a practical case, expanding a business becomes a problem and where the business will make negative profits for subsequent periods, it may be hard to finance other programs. Studies have also shown that when a business is financed by sole trader, there are lower incentives to work since the manager has no other financial obligations apart from making profits and expanding the business.
Banks and finance companies
Apart from personal funding, the sole trader can still get funding from banks that mainly operate as supermarkets of debt financing. Most banks and other lending institutions provide short term, mid-term and long-term financing for all asset needs, but specific to working capital, purchase of equipment or an estate (Terjesen & Frederick 2006). With bank loans, there is a general assumption that the sole trader is in a position to generate enough cash flows that will be used to cover the interest and also return the principal amount when due.
Before loan approval, the sole trader must assure the lending bank of repayment by providing personal guarantees alongside secured interests like mortgage or personal assets. This is because the entire business is the responsibility of the sole trader and any loss incurred the owner bears a lone.
The only advantage with this source of funding is that there is flexibility in repayment in which case the sole trader can pay off the loan a head of the set deadlines and terminate the agreement. Besides, the trader may apply for subsequent loans once the first loan has been repaid so that other areas that could not be financed can be considered for financing within the range of production.
However, banks are known to charge higher interest rates, which they mostly alter to following the changes in business cycles to meet their profit objectives. Unlike other lending institutions, bank operations are controlled by a physical authority that may decide to change both the interest rates and financial bases to meet specific economic goals without considering the negative impacts of the borrowing groups (Terjesen & Frederick 2006). Other than the higher costs of borrowing, there is double payment; interest and principal amounts, which again add to the overall cost of producing a product or service. This means that the sole trader will limit his or her production within a particular range meet both the interest rates and principal loans.
In general, most businesses find funds from high street banks and other financing institutions. The funds are either in the form of loans or bank overdrafts, alternative sources like credit sand factoring finance invoices.
Investors or shareholders
Another source of business financing is shareholders otherwise known as business angels. If the sole trader seeks to bring funds from outside sources, there is need to prioritize on interesting business projects that will capture the investment desires of business angels. On the same note, the sole trader may source external funds by seeking a capitalist venture, which could be a typical company that specializes in investing large sum of funds in new business ventures (Newman 2007). Contrary to the interest needs of lending banks and other financial institutions, outside and private sectors will provide funds with the objective of having a share in business operations and returns. Since the desire is to earn revenues from the capital invested, external financers may also provide to the skills, experience and expertise to the business. The participation of external investors to the business operations is vital because it becomes valuable as a cash injection to the business (Newman 2007). It is true from the investigation that most businesses prosper because of the financial support and skills of external investors. For the scenario given, the sole trader can meet the financial objectives by incorporating external investors through shares or interest projects.
However, the sole trader in this case will be operating and making business decisions on behalf of external investors in which case every decision must be in line with the financial needs of investors. This means that the sole trader will no longer have control over the business since the interests of investors must be met alongside the business needs (Terjesen & Frederick 2006). Where the largest share of the business profit is directed towards compensating shareholders, the manger experiences a reduction in capital growth, and as a result may not be in a position to expand the business (Newman 2007). The funding process also exposes the business to external competition arising from the shareholders, which may inhibit growth and where the investors control the largest share of the capital, the business may seize to be a sole proprietorship. In other words, the sole trader will be losing control over the business operation, and management as well as experiencing significant reduction in the amount of profit shares.
Grants from government
Alternatively, the sole trader may seek the assistance of government and private institutions to facilitate the financing process. The government and private sector provide finances to individuals and organizations in forms of cash grants and other direct means deemed fit for process initiation (Whittle 2010). The main reason why governments and private sector take part in business financing is to take part through financial policy in developing a strong financial base for national economic growth. The tremendous growth in technology industries as a service industry have impacts in areas of employment and the financial contributions of the government towards purchase, installation and adoption will improve the employment levels. Several government and private organizations have been established to assist small indigenous businesses and firms to invest in different areas of production alongside maintaining higher levels of living.
Government grants can be in form of non-refundable subsidies, loans and transfer payments to individuals with business ideas (Whittle 2010). As already stated, the grants are given by the government to boost business investments and general national economy. In cases where the government is the main financer, the sole trader will still maintain the initial control over the business. This means that the largest portion of profit will still be enjoyed by the sole manager while the government may only gain from the normal taxes and other remittance (Terjesen & Frederick 2006). In addition to financing, the government may provide free entrepreneurial training to boost the skills of the sole trader so that the little capital invested in business operations can be effectively managed to meet the desired economic growth. The government through its finances will also ensure that the sole trader operates in a secure business environment with limited market controls so that the business can get back the initial investment capital.
Even though the government offers the best alternative for businesses financing, the amount of funds provide may not meet all the financial goals of the business. This is because the government may decide to provide a fixed percentage of its funds, which may be inadequately distributes or insufficient to meet the £50,000 financial budget (Whittle 2010). The sole trader will therefore have to consider alternative sources of funds or contribute through personal funding in order to meet the portion of the capital.
New share issues and right issues
To a limited extent, the sole trader may decide to generate funds by venturing into capital market through new shares or through right issues. If the manager decides to operate through new share issues, then the objective would be to obtain additional funds. The trader may wish to obtain a stick exchange quotation or may be willing to operate without the stock exchange quotation. However, the most appropriate process is to issue additional new shares through an offer for sale, a prospectus issue, a placing, or an introduction.
On the side of right issue, sole trader stands a chance of raining new share capital by offering such shares to the existing shareholders, or by inviting individuals to subscribe for new shares based on the proportions of asset holding. While the main advantage with this source of financing is that the sole trader operates with existing stakeholders who are already familiar with business functions and processes, it is a requirement that the business must set lower prices to attract shareholders and make them accept the offer. Without such efforts, it may be hard for the shareholders to provide extra funds since there is fear of excessive dilution of shareholders’ earnings per share.
Operating through loan stock
The sole trader may opt for loan stock as yet another source of funding to finances part of the business processes. Loan stocks are long-term capital debts raised by the company with interests to be paid based on loan agreements. Most loan stocks have a fixed rate of interest and usually runs semi-annually. In this context, loan stock holders are considered long-term creditors (Terjesen & Frederick 2006). Loan stocks can be in the form of written acknowledgement or in the forms loans with interest payments defined to meet specific financial objectives.
Loan stocks are long-term obligations that the business must meet as at the time when they are due. The fact that the loans are calculated on the basis of the period of full payment allows sufficient time for the business to grow and expand its sources of finance before the set deadlines. It becomes hard for the business to fall out of its operations because the repayment terms for the loan stock is sufficient enough to warranty payment delays (Terjesen & Frederick 2006). The loan stock also provides the sole trader with a wide range of options to invest from meaning that the sole trader has the opportunity to compare the interest offer from different loan stock holders. From the investigation conducted, loan stock can be either be transferable or non-transferable depending on the terms of issuing. Where the loan stock ownership can be transferred to a second party, the business expands its financial scope, which means that there are higher possibilities of obtaining new investors.
On the other hand, loan stocks have fixed interest rates, which may at times be greater than the normal rates (Terjesen & Frederick 2006). It is therefore possible that the business will be forced to issue stocks at relatively lower prices so that investors can keep demanding the stocks in order to make higher profits. The business will therefore realize negative business profits, which may impede growth and process expansion.
Operating through venture capital
The sole trader also has an option of operating through venture capital, which is fund capture within an enterprise. The sole trader will have to invest venture capital in addition to extra funding from other sources. The business through the venture capital appreciates the gamble inherent in financial sourcing since there are higher risks a portion or the whole investment (Forte & Oppenheim 2011). Venture capital provides a base for reducing the risks of losing the entire or part of the investment. Similarly, a venture capital will ensure that the functions of the business are in line with the prospects of very high profits alongside obtaining substantial return on environment.
On the side of disadvantages, the sole trader may be forced to redirect its finances on substantial investment returns without recognizing the negative impacts attributed to the source of funds. Since the institution putting in funds to facilitate business growth recognizes the financing process a gamble, there are higher risks of losing part or the entire part of the capital and this may take a longer time before the revenues and other non-financial returns can materialize (Forte & Oppenheim 2011). Based on the stated risks, it is possible that the venture capital organization will expect higher rates of return on investment to meet the profit objectives and also compensate the growing business risks.
Franchising
Through franchising, there are expectations that the sole trader will expand business on lesser capital than the amount needed to run project. Where the business has already established, franchising is considered one of the most appropriate alternatives to raise extra capital for expanding the business.
The source of funding allows the franchisee to only compensate the franchisor for the right to run a local business (Forte & Oppenheim 2011). This means that the sole trader (Franchisee) can run his or her business without incurring the cost of initial establishment like the cost associated with trademarks and rights to operate a business. On the same note, the capital outlay required to expand the business and its operation reduces substantially while the image of the business improves since there is a possibility that the franchise will be motivated to get good results from the business activities.
From the discussions, even though personal funding is the most appropriate method of financing the sole business, raising £50,000 could be a problem and a loss of the same amount could be a setback to the owner of the business. It is therefore optimal for the sole manager to consider other alternative sources of funding (Forte & Oppenheim 2011). In this context, bank loans remain the best approach to meeting the financial needs and even though some of the banks are strict with their loans, this source of finance will allow the sole manager to explore other opportunities.
The contribution made by various methods of generating income for a large chain of restaurants
Restaurant managers believe that the various methods of generating income for a large chain of restaurant should help achieve certain basic unique aspects of a typical restaurant (Page & Connell 2007). The sources of income should improve lifestyle integration, performance techniques, create a conducive environment for business conception and also maintain managers’ close contact between restaurant managers and other stakeholders. The various methods of generating income include sales of foods and food production; sale of accommodation services; hosting business meetings and other types of conferences; providing a base for training, retraining, and vocational tours (Page & Connell 2007). The income earned from the mentioned sources are in most cases used to expand the restaurant and improve employee-customer relationship.
Conclusion
Even though business and service financing require initial capital contributions from owners, the decision to consider other sources of funds is optimal. Although the reasons for sourcing funds from funds varies based on the industrial needs, the primary objective is to meet capital asset acquirement, purchase of new machineries or facilitate construction and reconstruction of a business facility. Other than meeting the costs of capital assets, machinery and building, the cost of developing a new product of delivering a new service may be enormously high in which case alternative sources of funds may be required.
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