Starting a new business carries with it the greatest degree of risk. It may be possible to begin on a very small scale without risking too much capital. You will also have greater freedom of action. You will not be limited by decisions other people have taken in the past if you buy an existing business. Starting a new business requires finance. There are just three ways in which a business acquires money:
ú from the money invested in the business by the owner or owners, including any profit which they decide to reinvest.
ú by borrowing money from private individuals or from another organisation.
ú by buying goods and services on credit, i.e. having the use of the goods and services before they are paid for.
The basic principles of acquiring capital may be simple but the reality is far more complex. Each business will have its own particular requirements based upon such factors as:
ú the size of the business.
ú the stage of development it has reached. For example, two businesses with a similar number of employees and making a similar profit, may have totally different capital requirements. One business might be able to fund future investment from profits already made, but its future investment potential might be limited. The other business may need a large injection of capital if it is to take advantage of the market.
ú maintenance of control; that will mean loans to expand the capital rather than sharing the ownership with other people.
ú the organisations that make money available to businesses.
Let’s look at some basic definitions and the ways in which a very small business just starting up might find its capital in the first years of life.
1. The owner of the business invests money in it. This can come from savings or the sale of possessions. The important thing to remember is that it is the owner's money, to be spent as she/he wishes. If the money is lost, it is the owner's loss.
2. Money can be borrowed using possessions as a security. This statement means simply that if someone cannot repay the money then the person or organisation who lent that money can claim or sell that possession in order to recover the money they have lent. Mortgages are a specialised form of a loan on security. The security in this case is always property. All loans are usually made for a fixed period of time, for a fixed amount and at a fixed rate of interest.
3. Hire purchase and credit sales for equipment have a great deal in common. The difference lies in the ownership of the item. If a business buys a display refrigeration unit on hire purchase it does not own it until the last payment has been made. If it is a credit sale, it will own the refrigeration unit as soon as the initial payment has been made.
4. Trade credit is a system whereby a business receives the ownership of goods or services and does not have to pay for them immediately. The time involved can vary. In some businesses the goods or services bought in can be used and have brought in income before they have to be paid for.
Businesses can also lease equipment. If the equipment is needed for only a relatively short period of time then it is sensible to hire it. If the equipment is going to be used continuously then it is better to lease equipment.
2.Comprehension check.
Read the text again more carefully. Are the following statements true or false? Correct the false ones:
a) If you decide to buy an existing business it is sensible to start on a large scale without risking too much money.
b) The finance invested in the business, borrowings from natural persons or from another organization, purchasing commodities or credit are the possible ways through which a recently set up business obtains money.
c) There are four basic factors determining particular requirements of each business.
d) Money invested in a small business just starting up can be obtained from savings or the sale of possessions.
e) If a person fails to pay back the money then the lender can divest that possession.
f) Hire buying and credit sales facilities have many discrepancies.
g) Trade credit requires to pay promptly for the ownership of goods and services.
h) It is sensible to hire the equipment if it is going to be used continuously.
