Meaning of Financing
Financing: means the act of providing money for a project or business.
Financing is the act of providing funds for business activities, making purchases or investing.
 Meaning of Financing Business
Financing Business is an act of providing money for your business in other to yield profit or for profit making

Business finance is that business activity which is concerned with the acquisition and conservation of capital funds in meeting financial needs and overall objectives of business enterprise.
In financing business three things are needed in other to function very effectively. They are called 3As of financing business.
1st A – Availability
2nd A- Acquisition
3rd A – Allocation

 Business Plan Writing Professionals

Availability in business means how accessible the business you are about to enter is. Is it a seasonal business or all weather business.
Acquisition in business is to acquire assets needed for the business in other to excel.
Allocation in business means to set business in a well designated area for the business in other to get customers.
Types of Business Finance.
Short term finance, Medium term finance and Long term finances
Short term finance is known as current liabilities because they will have to be paid in the near future, usually in the current or next accounting period.
 Short term finance. This must be repaid within one year e.g trade credit, inventory financing, and family or friends etc
1.      Trade credit are permitted a period of time between buying goods and having to pay for them. This money owed to creditors can be used in the business until it has to be paid. A business which over uses this source of finance is said to be “leaning on the trade.”

Advantages of Trade Credit
1.      Interest does not have to be paid
2.      No security has to be given for it
3.      It helps in the growth of the business

Disadvantages of Trade Credit
1.      Cash discounts available for prompt payment may be forfeited.
2.      Future credit or deliveries may be refused, if the practice is continued.
3.      No agreement was reached, so the debtor can easily go with the money without paying for it.
4.      Not paying at the right time may collapse the business of the creditor.

2.      Inventory financing: stock (inventory) can be used as security for a loan the types of stock that can be used as security include Jewelleries, wines and spirits, and cars. This may be done in one of three ways

a.      Chattel mortgage
b.      Trust receipt
c.      Field ware housing

1.      Chattel mortgage is an itemized list of the stock used as security is given to the lender by the borrower. If stock is sold and not replaced, finance from the sale must be used to reduce the debt.
2.      Trust receipt: stock is itemized in a legal document signed by the borrower, and as listed goods are sold, the lender is repaid.
3.      Field warehousing: The goods are placed in a specific warehouse. As they are sold, permission is sought from the lender for their release. They money received is used to repay the loan.
4.      Family or friends: Some businesses get started with money from family or friends. It makes sense. These people know you better than anyone else, and are aware of your ability and weakness. They will also support you in what you want to do (As long as your plans are reasonable). However, there are also potential problems attached in using “friendly money” ignoring these problems might mean that your business comes at too high cost you might lose your friendship. Some of the problems that you must plan to avoid are:
a.      Don’t be too relaxed about financial agreement
b.      Be open to their advice.
a.      Don’t be too relaxed about financial agreement: when you deal with family or friends about money, they may feel awkward about discussing to many details. It’s like a marriage no one wants to talk about divorce when they are getting married without a contract can get terribly mess when it breaks up (especially regarding money) so, prepare a written agreement between you and the lender, and be as specific about everything as possible.
i.        Exactly how much will you borrow?
ii. Exactly how much will you pay back every mouth?
iii. Which month will you begin repaying the loan?
iv. What interest rate must you repay?
v. What happens when the banks change their interest rate?
vi. What if you can’t afford to repay for a mouth or two?
vii. What if you want to pay it back quicker than agreed?
If you can, get an adviser to help you talk through all the issues. A lawyer might be too expensive, but you could ask a mutual friend who is already in business or a financial adviser. Your bank may also be able to make a suitable person available.
b.      Be open to their advice: As an independent, self –starting kind of person, you may expect yourself to have all the business problems. This is not realistic, and may prevent you from making the best decisions. Let others hear your challenges and suggest solutions; you don’t need to always take their advices, but be open to it.

In short term loan you need to ask yourself these questions in other to avoid mistake.
·        P-A-R-T-S
·        P- Purpose
·        A-Amount
·        R-Repayment
·        T-Terms
·        S-Security

If you ask yourself all these questions and they are positive you go for the loan and if the questions you ask yourself are negative you withdraw.
Medium-term source of fiancé is finance that is available to a firm for a certain fixed number of years, usually one to five years examples are: Hire-Purchase (HP), Leasing an term loans.

a.   Hire –Purchase (HP) enables a firm to acquire equipment without over-stretching its financial resources, as the only outlay the firm is committed to is the repayments. In Hire purchase the lending company owns the goods until the final payment is made, so the goods can be repossessed if the borrower defaults.
2. Leasing- a firm may rent an expensive asset from a leasing company rather than buying it. In this way it has use of the asset without having to pay the purchase price. Leasing is used by a company to acquire expensive pieces of equipment, such as computers, cars, vans and lorries the leasing company (a bank perhaps) buys the equipment, getting any tax concessions that are on offer, and then leases it to a firm the tax concessions reduce the rental charges. The person who owns equipment being leased to another is called lessor while the person the equipment is been leased is called lessee.

Advantage of HP
1.      The firm has the use of the asset while still paying for it by a monthly or annual payment
2.      No security is necessary
3.      At the end of the repayment period, the firm owns the asset.
1.      The interest rate is high
2.      By the time ownerships passes, the asset will have depreciated considerably or indeed may be obsolete.
Advantages of Leasing
1.      No capital is tied up, so there is no strain on working capital
2.      fixed assets are acquired
3.      No security is required
4.      All rentals are allowable for tax purpose

3.      Term Loans: A term loan is one which is repaid by monthly installments. A term loan is provided by a bank for a term of to five years. A special term-loan account is opened, and the repayment is transferred to it each month by standing order.
AAA Govt./Charities/School
Lowest Rate
AA Industry
Inter mediate rate
A Personal borrowers
Highest rate

The rate of interest on a term loan is highest for a personal borrower.
                        Merits of Term Loans are
1.      Repayments are based on the borrower’s ability to repay.
2.      the loan provides a firm with large sum of money
3.      Asset can be acquired by the firm as if for cash permitting the company to avail of the benefits of cash transaction. this can done because the term loan finance is transferred to the current account.
4.      The interest rates may be reasonably attractive.
What is an Asset? An asset is something that will bring in revenue to a business. eg cash, raw materials, factory machinery, stocks and debtors. These assets can be grouped into fixed assets and current assets.
Current assets are the cash, raw materials and debtors. they constantly change and so are also known as floating or circulating assets.
Fixed assets are the machinery and factory building (also known as plant). Fixed assets are sometimes referred to as fixed capital; current assets less current liabilities are working capital.
Liabilities are debts, but they are also the source of assets. The opposite of assets is liabilities. Liabilities are really debts, which are owned either immediately or at some time in the future. Liabilities are incurred so that assets or capital can be acquired. For instance, you would usually need a loan in order to buy a piece of machinery.
3. Long term source of finance: a long-term source of finance is available to a firm for a considerable period of time, more than five years. E.g owner’s capital, shares, debentures, retained profits or earnings, government finance sales, lease back and venture capital
This source of finance could almost be called a permanent liability, as share holders’ funds are repayable only in the event of the winding-up of the company (except in the case of redeemable preference shares)
2. Debentures involve long-term borrowing of funds by a firm, usually for capital expansion. Debenture borrowing for long period usually from banks at fixed rates. The legal document governing the loan is called an indenture. It includes such details as the interest payable and provisions for eventual repayment. Debentures are loans, not shares, and interest has to be paid on them whether a company makes a profit or not. Although debentures may be issued only by a limited liability company, debenture holders have no direct control over the running of the company (unless they have nominated one of their members to sit on the board of directors).
The Following are some Types of Debenture
1.   Naked or simple debentures- not secured by any of the company’s assets.
2.   Fixed Charge debentures– Secured by a mortgage on some of the company’s assets.
3.   Floating charge (mortgage) debentures- backed by all the assets of the firm.
4.   Convertible debentures – the holder has the option of purchasing some of the company’s ordinary shares in the future.

               Merits of Debentures
1.   Debentures may be a cheap source of finance, as in the event of large profits being made, the debenture holders will still get only their fixed rate of return.
2.   The interest paid to debenture holders is tax deductible
                            Demerits of debentures
1.   Debentures are strictly controlled by the indenture.
2.   They must be paid before any dividends are paid and regardless of the level of profits.
3.   Where debentures are secured by assets, the company may be restricted in its disposal of these.
(3) Owner’s capital: is a fund provided by the entrepreneur(s) (sole trader or partners) for the business as long as the business continues in operation, or until a partner wishes to leave.

4.  Retained Profits or Earning: Retained profits are sometimes known as reserve capital. These are profits which really belong to the shareholders, but which are not distributed as dividends because they are needed for the long-term expansion of the firm. This practice is referred to as “ploughing back profits” (put money back to business).

                 Merits of Retained Profits or Earnings
1.   The control of the company is not affected
2.   It reduces the financial risk to the business, since they are owned to the shareholders of the company and not to some outside body
3.   There are no interest charges
4.   They don’t have to be repaid.

                       Demerits of Retained Profits or Earnings
1.    It reduces the dividends paid to shareholders, which may make shareholders dissatisfied
2.    Reduced dividends may reduce share prices, and may make the company susceptible to a take over bid.

(5) Venture capitals: Venture capital is provided by venture capital companies. They give both “seed”, or start up capital, and development capital. Providing seed capital is risk because it will be used in an untried venture. Development capital will help an existing company to develop and grow.

(6) Government finance: finance is provided for firms in Nigeria by many state agencies including (1) Bank of Agriculture (BOA) (2) Federal government grants through registering

(7)Sale and Leaseback: where a firm with a considerable investment in land or buildings funds itself short of finance, it may sell its premises for a capital sum and then lease them back. Some finance house specialize in this type of finance. Leases usually run for a period of twenty one years, with an option to renew at the end of that period. Rents are usually reviewed at seven years intervals.

                           Merits of Sale and Leaseback
1.   The company can continue in business in the existing premises
2.   Rent is tax- deductible
3.   Control of the company is not changed
4.   Capital tied up in land and premises is released for use
5.   The company receives an immediate injection of capital without having to borrow from a bank 

                    Demerit of Sale and Leaseback
1.   A valuable appreciating assets is cost to the company.
2.   The balance sheet can no longer show the premises as a fixed    asset.
3.   Rent must be paid on the property, and this is subject to review.
4.   The property cannot be used a security for a future loan
5.   There may be limitations as to use of the building by the company.

                                   Summary: Source of Finance
Short –term finance
Medium-term finance
Long- trem finance
Trade credit
Hire- Purchases
Family or friends
Inventory financing taxation etc
Term loans
Retained profits sale and leaseback
govt. finance
venture capital owner’s capital
                         Choosing a Source of Capital
Factors to take into consideration when choosing a source of finance
-    Repayments
-    Risk
-    Control
-    Cost
-    The firm
-    Security
-    Tax
-    The asset
-    Amount

Repayment: The amount to be paid each year in interest and principal repayments will affect the income of the business if repayments on a particular source of finance are high, then the income of the business will be reduced, leaving less for (a) future expansion, and (b)shareholders’ returns (dividends).

Risk: The risk attaching to a source of finance must be assessed. If a company borrows large amounts, particularly at high rates, then it may have trouble meeting the repayments.

Control: If existing owners of a business do not want to see control slipping away from them they will arrange a source of finance which will minimise the risk of this. Two cases where control of a business might be lost by the owner would be.
a.   A large loan from a Merchant bank which insists on adherence to stringent conditions.
b.   The issue of extra voting shares in the business

Cost: The cost factor is very important in securing finance. The higher the cost of the finance, the less attractive it becomes.

The firm: the type and size of firm seeking the finance to some extent dictates the type of finance to be used example, a large cassava exploration company would seek large sums of money in different was eg) Banking of Agriculture (BOA) than a medium- sized company which is manufacturing shirts.

Security: the assets which are available to be given as security for a loan will affect the type of loan that can be sought.

Tax: the tax effects are important some loans are tax- deducible. Issuing extra shares, for examples, is not a tax write-off.
The asset being acquired. The firm will try to match the asset with a suitable source of finance, (a firm must match source and use, eg to acquire a building use a long term loan).

Amount: the sum needing to be borrowed will dictate the manner in which it is borrowed eg a reasonably large firm borrowing N50,000,000,00 for 5years is more likely to use long term loan not short term loan.

Source of Long Term Funds
Firms need long-term funds through debt finance (that is, fund from outside the firm) or through equity financing (by drawing on internal sources).
1.   Debt financing: long term borrowing from sources outside the company debt finance- is a major component of most firms’ long-term financial planning. Long-term debts are obligations that are payable more than one year after they were originally Issued. The two primary sources of such funding are long-term loans and the sale of corporate bonds.
Corporate bonds is a contract, a promise by the issuer to pay the holder a certain amount of money on a specified date. Bond issuer do not pay off quickly. In many cases, bonds may not be redeemable for 10years, bonds involves interest. Bonds are the major source of long term debt financing for most corporations. Long-term loans are attractive to borrowers for several reasons
1.   If the firms need changes, loans usually contain clauses making it possible to change terms.
2.   The duration of the loan can easily be matched to the borrowers needs.
3.   The firm need not make disclosure of its business plans or the purpose for it is acquire the loan (in contrast, the issuance of corporate bonds requires such disclosure).

1.   Long term borrowers may also face restrictions as conditions of the loan. For example, they may have to pledge long term assets as collateral or agree to take on no more debt until the loan is paid
2.   Borrowers may have trouble finding lenders to supply large sums.

(2) Equity financing means use of common stock and/ or retained earnings to raise long term funding.
For example, founders may increase personal investment in their own firms. Sometimes equity financing is preferable           
a)  Common stock
In common stock people who purchase it seeks profits into forms, the dividends and appreciation. Over all, shareholders hope for an increase in the market value of their stock (appreciation) because the firm has profited and grown. By issuing shares of stock, the company gets the funds it needs for buying land, building and equipment.
b)  Retained Earnings:
Retained earnings are profits retained for the firms use rather than paid out in dividends: If a company uses retained earning as capital, it will not have to borrow money and buy interest. If a company has a history of reaping profits by reinvesting retaining earnings, it may 'very attractive to some investors. However, Retained earnings means smaller dividends for shareholders. In this sense, then, the practice may decrease the demand for and thus the price of the company's stock.

Hybrid Financing: Preferred Stock
A middle ground between debt financing and equity financing is the use of preferred stock. Preferred stock is a “hybrid” because it has some of the features of both corporate bounds and common stocks. As with bounds, for instance, payments on preferred stock are fixed amounts such as #100 per share per year. Unlike bonds, however, preferred stock never matures; like common stock, it can be held indefinitely. In addition, preferred stocks have first rights (over common stock) to dividends.
 A major advantage to the issuer is the flexibility of preferred stock. Because preferred stockholders have no voting rights, the stock secures funds for the firm without jeopardizing corporations is not obligated to repay the principle and can withhold payment of dividends in lean times.

          Choosing Between Debt and Equity Financing
 Needless to say, an aspect of financing planning is striking a balance between debt and equity financing because a firm relies on a mix of debt and equity to raise the cash needed for capital outlays, that mix is called its capital structure. Financial plans, thus, contain targets for capital structure; an example would be 40 percent debt and 60 percent equity. But choosing a target is not easy. A wide range of mixes is possible, and strategies range from conservative to risky.
  The most conservative strategy is all equity financing and on debt: A company has no formal obligations to make financial payouts. As we have seen, however, equity is an expensive source of capital. The riskiest strategy is all debt financing. Although less expensive than equity funding. Indebtedness increases the risk that a firm will be unable to meet its obligations (and even go bankrupt). Somewhere between the two extremes, financial planners try to find mixes that will increase stockholders' wealth with reasonable exposure to risk.
                       CASH FLOW
Cash flow is the movement of money into or out of business, project or financial product. It is usually measured during a specified, limited period of time. Measurement of cash flow can be used for calculating other parameters that give information on a company's value and situation.
Cash flow can be used, for example, for calculating Parameters: It describes cash movements over the period.

1)  To determine a project’s rate of return or value. The time of cash flows into and out of projects are used as inputs in financial modes such as internal rate of return and net present valve.
2)   To determine problems with a business’s liquidity. Being profitable does not necessarily mean being liquid. A company can fail because of a shortage of cash even while profitable.
3)  As an alternative measure of a business’s profits when it is believed that accrual accounting concepts do not represent economic realities.
For example: A company may be notionally profitable but generating little operational cash (as may be the case for a company that barters its products rather than selling for cash). In such a case, the company may be deriving additional operating cash by using shares or raising additional debt finance
4)  Cash flow can be used to evaluate the ‛quantity’ of income generated by accrual accounting. When net income is composed of large non–cash items it is considered low quantity.
5)  To evaluate the risks within a financial product,
 Cash flow notion is based loosely on cash flow statement accounting standards. It’s flexible as it can refer to time intervals spanning over past future. It can refer to the total of all flows involved or a subset of those flows.
Corporate cash flow statements include three components
a)  Cash flow from operating activities
b)  Cash flow from investing activities
c)  Cash flow from financing activities.

a)     Cash flow from operating activities refers to money generated by a company’s core business activities. This number highlights the firm’s ability core inability to make a profit. While it provides good insight into whether or not the firm is making money , the other components of the cash flow statement also needed to be taken into consideration in order  to develop more complete picture of the company’s health
b)     Cash flows from investing: Cash floe from investing may sounds like the amount of money a company generates from investments it has made, but the accountants who fill out corporate balance sheets are generally not referring to the number of shares of the company has bought or the number of municipal it has sold. Rather, from a corporate perspective, they are generally referring to money made or spent on long–term assets the company has purchased or sold. Upgrading equipment and buying another company to take over its operations and gains access to its clients and technology are investment activities from a corporation’s point of view. Both of these activities cause companies to spent money, which is captured on a cash flow statement as negative cash flow. Similarly, if a company sells off old equipment   or sells a division of its operations to another firm, these activities are also captured on paper as income from investment.
c)     Cash flow from financing activities measures the flow of cash between a firm and its owners and creditors. Corporations often borrow money to fund their operations, acquire another company or make other major purchases. Timely operational expenditures, such as meeting payee requirements, would be one reason for cash–flow financing. Companies are essentially borrowing from cash flow they expect to receive in the future by giving another company the rights to an agreed portion of their receivables. This allows companies to obtain financing today, rather than at some point in the future.

1)  Controlling Expenses: one of the most effective ways for you to improve cash flow is to control expenses. Business owner agree the best single action they can take to save their businesses money, improve cash flow and stay on solid ground is to create and adhere to a monthly budget.

2. Cost-cutting Strategies: challenges every expense and assume your business is spending two much. Here are three specific actions:

a. know your strategic costs: you should understand the things that make and save the most money and try to aggressively cut everything else. Costs directly linked to product quality, excellent customer service,, profitable new sales or your defined competitive edge are strategic. You should consider everything else overhead.
b. Never let expenses become routine: periodically dive into non-strategic costs to find savings. Search a couple of nonstrategic expense accounts each month for expenses you can remove or slash.
c. review all expenses and costs: according to a study of the 80 most productive companies in the world in the book less is more: how great companies use productively a competitive tool in business, project oriented executives ask one simple question before they make any decision: what’s the good business reason to do this? If there’s no easy answer to this question, reconsider those costs.

3. Build a Smarter Budget:
To make solid determinations as to what expenses can be eliminated, you should understand and track monthly expenditure. Here are three actions you can take related to effective budgeting.
a.   Create a monthly budget, and stick to it: you can’t manage what you can’t measure, although two- thirds of owners agree they are responsible for cost control, many don’t have monthly budgets according to a report of small business. Owners by the national foundation of independent business. According to Bob fifer, the author of the book double your profits, if you want to save a lot of money in every little time set a budget. It can save you a significant amount of money every month.
b.   Start your budget with zero: profit- oriented managers create zero- based budgets” where they start with a clean slate every year: spending a weekend adding up all of your monthly cost and looking for duplication, waste or purchasing savings may sound boring, but it likely will identify 10 percent cost saving.
c.   Use your gut: one key to setting budgets is to avoid “analysis paralysis” and consensus when setting cost cutting goals. In terms of saving your time and money a back-of –the-envelope cost- cutting goal for your budget from the top down beats a detailed budget based on last year’s expenses, excesses and faulty assumptions. If you cut too far, you will know pretty quickly and can adjust.

3.   Compare your Expenses: small business owners build strong relationships with their vendors and service providers, but that doesn’t mean they should strong relationships with their vendors and services providers, but that doesn’t mean they shouldn’t consider benchmarking and bidding out all of their top expenses. Here are two related strategies.
a.   Bid out costs regularly: Any cost that does not go out for bid is a wasted cost- saving opportunity. Don’t accept price increases without seeking competitive bids even telling a supplier you are considering putting work out to bid can generate cost- saving ideas.
b.   Benchmark your cost: ask your peers where you can find a better deal. If they cannot buy your product or help you find customers, they can often help you shop find out where your competitors buy and what they pay.
4.   Get Solid   Control- In addition to cutting expenses out right, building a budget and consulting with your peers, controlling expenses often starts with the right systems in place. Here are four strategies to obtain improved cost control.
a.   Approval all expenses: Set approval by expense category and employee. The secret is doing this without spending a lot of time. One way is to use corporate credit cards equipped with sophisticated, employee –specific expense – control features. Another is to require employees to ask permission personally, or in writing, on high value expense categories.
b.   Automate expense control: you can better control most of your company’s expenses by spending a little time using basic online banking tools and controls. Set the authority to approve all expenditures and restrict others using automated entitlements, authorization and spending limits, particularly for strategic or high value expense categories.
c.   Track expenses regularly: create a flash report to directly measure cash, profits and net worth. Watch them monthly, weekly, weekly or even daily turn your accountant into a “virtual CFO” who can generate the regular you need to manage profits give your CPA selective access to your online financial to effetely generate the reports you need to manage cost and profits.
d.   Use online and real-time tools. Your bank can help  you set-up a range of alerts and reminders related to ash consuming transitions with online banking, bill pay, tax payment, tax payment, direct deposit, pay roll and cash- management system these cost- control measures improve visibility related to expenses and allow you to gain better control over tomorrow’s projects.

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Risky W. Griffin Taxas A & M. University copyright@2005,2003,2000,1998,1995 by Pearson education, inc, upper sanddle river, new jersey, 07458, USA Source of long term fund. Page 485 and 486
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Cashflow-Wikipedia, the free encyclopedia- htt://en.m. flow.
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