Potential sources of finance for very new businesses
Initial owner finance is almost always the first source of finance for a business, whether from the owner or from family connections. At this stage several of the assets may be intangible and thus external financing is an unrealistic prospect at this stage, or at least has been in the past. This is habitually referred to as the equity gap. With no planned market for Business Angel Finance and which is otherwise difficult to set-up there are limited means by which SMEs can find equity investors. Trade credit finance is significant at this point too although it is nearly always very expensive if viewed in terms of lost early payment discounts. As well it is inevitably very short term and very limited in duration (except that always taking 60 days to pay a payables will obviously roll-over and become medium term financing). Business angel financing may be significant and is represented by high net worth individuals or groups of individuals who invest directly in small businesses. It is probable when a new business or its owner, can offer adequate security that a bank loan may be arranged. An additional form of security that may underpin a bank loan is in the form of a guarantee from a reliable individual or other business with a banking track record.