Sources of Finance for a Small Company

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External finance is a financial backup for a business which they get from outside the company. Being a small private company they do not have an option of public issue, and as they also don’t want to raise any equity finance from their existing shareholders there are some external sources that are still open. These are discussed below. The simplest option available is to get finance from AIM (alternative investment market); a stock exchange for small companies. Company can issue debentures, convertibles or warrants to obtain finance and invest in its capital assets to generate profit. AIM is specially designed for companies that are too small to comply with the formalities of a stock exchange. The easiest way of getting a loan from a bank is to get an overdraft. Although most companies do not like to finance their long term capital asset on overdraft as it’s basically a short term loan due to its nature of being repayable on demand. Under this option company can get finance quickly, with minimum complexities but high rates of interest would be charged. Bank loan is the most well-known method for a company to obtain finance. Company can apply for a bank loan that could be secured; backed by assets or unsecured; backed by personal guarantee. If a loan is secured and is backed by company’s assets, then interest rates would be lower because of less risk being involved for the lender. Interest rates will be higher in case of an unsecured loan, though they will still be less than the interest rates for an overdraft. Sale and lease back is another option available for companies under which they can go to banks or other financial institutions and sale their assets to banks which they will immediately acquire on a finance lease from the same bank. The main benefit for a sale and leaseback is that its off-balance sheet finance and someone checking the financial statement

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