Obtaining finance is crucial for any business. And, finance decisions are some of the most important that managers have to make.
It is because business activity cannot take place without finance. Or, the means of purchasing the materials and assets before the production of a good or service can take place.
Why is obtaining finance such as major problem for new entrepreneurs?
- Lack of initial capital. Many entrepreneurs have very limited personal savings. Lack of sufficient own finance when setting up their own business will most likely not allow the business to be fully operational.
- Lack of knowledge of available sources of finance. New entrepreneurs may certainly lack awareness of all of sources of finance that are available on the market. Neither they have any knowledge about financial support and grants available for new and small businesses. The governments usually tend to support business start-ups in many ways as it is good for economic growth.
- Lack of credibility. Most owners of new or small businesses do not have necessary credentials and trust to effectively secure funding from external sources of finance. Even if a new entrepreneur is able to borrow some money from family members and friends, the funds may not be sufficient. It is simply too much risk for banks to lend money to people who do not have good reputation for being successful entrepreneurs in the past.
- Weak business plans. A poorly planned and written business plan will fail to convince a potential investor of the chances of success. It will also discourage banks and other lending institutions from issuing a loan to the business.
- Poor credit history. Lack of any trading record to present to banks as evidence of past business success will discourage lenders from approving loans. A strong trading record would tend to give a bank confidence when deciding to lend money or not for a new venture.
- Interest is too high. Also, in case of taking a bank loan, there will be relatively high interest charges which will affect future profits and the cash flow position of the business. Because interest has to be paid on a loan every month, it will increase expenses, therefore lower Net Profit After Interest and TAX.
- Lack of collateral. New business owners often have to use their own assets such as a house or a car as collateral. Collateral is financial guarantee that the asset will be transferred to a lender in case a borrower fails to repay the loan. Banks are not stupid. Without a solid guarantee that can be used against the bank loan, chances are very small that the bank will approve a loan. There is simply too much risk for the bank of losing the money by lending to so called ‘naked people’ who do not own any valuable assets.
In fact, shortage of liquid funds and problems with obtaining finance is one of the main reasons for businesses failing.
