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Informal Sources of Finance for a New Company

 

Once a new company has ascertained its funding requirements and has a realistic business plan and budget in place, it can then start reviewing the various sources of finance which might be available to it.

Informal sources of finance are largely those which do not require written and formalised agreements before such funding is acquired. They might include some of the following.

Own Savings

Some avenues to gaining finance for a new business might include internal sources such as an owner’s personal money.

Where this is used in conjunction with external financial help, this can demonstrate that the owner has some confidence and commitment to the venture and might make it easier to gain money from others.

Both the amounts and the proportion of the total funding requirement that is needed which comes via personal means will be a factor in the levels of risk others will perceive their investment has, should they decide to add their funds.

Family and Friends

An extension of meeting the financial requirements of a new company through personal savings is to seek such funding from family and friends.

This might have the advantage of being interest free or carry a lower charge compared to that of a bank loan.

Depending on the relationship and the willingness of the family member or friend to aid the business, the repayment of such finance might be flexible and allow the company to carry on its trade without the added concerns of regular interest and capital payments.

Such Informal agreements can be a disadvantage however, if the person requests that the money is repaid at short notice and this in turn causes working capital shortages for the business.

Credit from Suppliers

It is possible that by taking longer to pay creditors that the company might be able to use such delays to fund its operations in part.

The salient issues with this type of financing are that it is a largely unsecured means of running a business and relies heavily on the goodwill of a new supplier.

Many business start-ups find it difficult to gain extended credit terms from suppliers who are naturally suspicious of their lack of trading history.

In the absence of any prior relationship with a particular supplier, a budget or cash flow forecast which depicts that the success of the business is hinged on obtaining extended credit terms might be viewed as improbably.

 
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