Small Businesses require funds for starting the business, purchasing inventories, expanding the business and strengthening their financials. At the early stages whereby an entrepreneur may have lower funds, he may borrow for the startup capital. Since businesses depend on assets, the owner may require funds for purchasing assets and other inventories which depending on the growth and the profits, the owner needs money to expand the business which is followed by a firm focusing on its financial strength for instance, liquidity, capital or other ratios that are required to portray the business in the external world (Traci & Wolken, 2006).
There are two sources of funds through the lifecycle of a firm namely owner investment and bank credit. In the early life of a firm, the business mainly relies on bank loans with about two thirds of the total amount being from bank loans, lines of credit and credit cards. The other is from owner investment. According to statistics, about 7% of the startup amount is from credit cards either from the owner’s personal or business credit card (Traci & Wolken, 2006). The U.S. Census Bureau claims that most of the small business owners do not have startup capital hence employers made use of financial institution compared to non-employed people who sort capital from borrowing their friends and families and their own savings. The later years of the firm rely mainly on debt and equity.
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Lastly, debt is mainly borrowing money whereas equity is investing money inform of shares and other investments that would enable more productivity and profit. Equity intends to share responsibility in case of losses and sharing of earnings in case of profits but debts must be paid back and mainly have interest rates. The lender is not subjected to any dividend or ownership whereas a shareholder is liable and counted among the owners (Traci & Wolken, 2006). Debts include loans from banks, relatives, trade credits, and loan guarantees whereas equity comprises of founder’s capital, shares, grants and promissory notes of owners.
Reference
Traci, L. M., & Wolken, J. D., (2006). “ Financial Services Used by Small Businesses: Evidence from the 2003 Survey of Small Business Finances ” Federal Reserve Board, Federal Reserve Bulletin
