SOURCES OF BUSINESS FINANCING

There are several funding schemes which are provided within the United States in order to support business organizations in their transactions. They provide capital for entrepreneurs to boost their businesses, and pay at a later date. This enables many businesses to become successful since the government helps them to stabilize their operations(Hadzima, 2010). Below are some of the ways through which business financing occurs;

a)      Small Business Administration Loans

Small Business Administration is an American Agency which ensures that the welfare of small businesses is maintained. This is achieved through supporting their growth and development. It guarantees loans to the small businesses through lending of businesses partners to them. It does not award loans to the entrepreneurs directly but it ensures that they get the amount which is necessary for facilitating their development.

Small Business Administration has entrusted the United States Bank with the responsibility of lending loans to entrepreneurs in order to promote their operations. It also recommends them to other financial institutions and economic development organizations in order to obtain mutual benefit from each other. It ensures that the loans awarded involve the least risks to the lenders. This enables them to avoid losses which may be incurred through offering losses to unfruitful entrepreneurs who may find it difficult to repay them.

Moreover, it ensures that the small businesses are awarded adequate amounts which would help them in promoting their transactions. This promotes the percentage of benefits which the entrepreneurs would be able to achieve through utilizing the availed funds. However, for an enterprise to qualify for being awarded the loans, it should be a profit-making organization. Its size is also considered to make sure that it meets the set requirements by the agency. Moreover, before awarding of loans, the financial standings of the organizations are investigated in order to determine whether they qualify for loans or not(Metrick, 2007).

Advantages of Small Business Administration Loans

i)                    Lower Down Payments

The Small Business Administration ensures that the loans are charged lower initial payback amounts in order to give the entrepreneurs amble time for generation of profits. Therefore, they are favorable to small businesses since they allow adequate time for the entrepreneurs to benefit from them without struggling to pay back. The down payments are affordable to many entrepreneurs hence ensuring that they benefit many of them.

ii)                  Awarding of High Amount

These loans are calculated to fund approximately ninety percent of business operations of a particular organization. This is adequate amount which can be used to promote operations of thesmall businesses hence making them to become successful. The Small Business Administration guarantees loans which amount up to $11.25 million for any qualified entrepreneur.

iii)                Longer Repayment Terms

The main motive of the Small Business Administration is not to generate profits from the transactions of the entrepreneurs. It focuses on helping them to develop their businesses. Therefore, they allow them to take up to a period of twenty five years before paying back the loans. This is aimed at ensuring that they do not interfere with the success of the entrepreneurs through making them to strain in repaying the loans. Moreover, it ensures that the entrepreneurs use the profits which they generate to repay the loans. This ensures that all business operations run smoothly.

Types of Small Business Administration Loans

The American federal agency guarantees loans of five types in order to ensure that they cover a wide range of business needs. These loans are offered by the United States Bank to the for-profit businesses. They range from $25 000 to $11.25 million depending on the size of the borrowing organization(Kieso, 2007). It provides loans for the following business operations;

i)                    Commercial Real Estate Transactions

This type of loans is awarded to the investors who are interested in conducting real estate purchases. They are provided with funds which would enable them to develop rental, or vocational homes. A certain percentage of the rent which is collected from the houses is used to repay the loans after the agreed period. They are useful to many investors since real estate purchases require high initial capital which becomes a challenge to many investors hence affecting the success of the businesses.

ii)                  Business Acquisition or Expansion

Some Small Business Entrepreneurs may be interested in purchasing other business enterprises, or expanding the operations of the ones which they already have. They require funds in order to accomplish their dreams. However, the profits which they generate from their daily transactions may not be adequate to facilitate the development plans. They require loans in order to accomplish their interests. Therefore, the Small Business Administration intervenes to guarantee loans for these entrepreneurs in order to support their projects.

iii)                Construction

This type of loans is awarded to the business persons who engage in construction projects. For instance, some constructors opt to apply for loans in order to purchase the required materials for construction before being paid by their employers. They enable construction projects to be completed within short periods since they make funds available for catering for all expenses incurred. They can be repaid after completion of the construction projects.

iv)                Working Capital

The Small Business Administration connects entrepreneurs with partners in order to provide funds for them to purchase the required equipment to support their businesses. Moreover, entrepreneurs require investing more capital into their businesses in order to maximize their profits. They may not have the funds hence making them to seek loans from the financial institutions. They can also obtain loans from the United States Bank which is the most preferred institution for offering Small Business Administration Loans.

v)                  Debt Repayment

Many Business enterprises in other nations are forced to terminate their operations due to bankruptcy. However, the United States government ensures that the selected federal agency takes care of the needs of small businesses in order to ensure that they do not run bankrupt. It guarantees loans which are aimed at enabling them to settle their debts with ease. This promotes healthy business practices since entrepreneurs are provided with favorable environment for conducting business without being disturbed by chaotic lenders(Berezin, 2005).

b)      Master Limited Partnerships

Master Limited Partnerships are traded publicly whereby they involve two types of partners. They involve limited partners which provide capital to the Master Limited Partnerships and in return get awarded income distributions. These distributions are provided quarterly hence providing funds to the people who invested their amount into the partnerships. Therefore, business organizations can choose to invest some of their profits in these partnerships in order to obtain benefits in return. The quarterly distributions are divided according to the percentage of investment hence the more an entrepreneur invests, the large the amount he receives in return.

They also involve general partners who are held liable for managing the practices of the Master Limited Partnerships. They provide any emergency requirements for ensuring welfare of the partnership and receive compensations in return. They have more managerial duties than the limited partners who concentrate in investing their financial resources only. The general partners represent the Master Limited Partnerships in most organizational levels and oversee its overall performance.    

However, for businesses to qualify being regarded as Master Limited Partnerships, they must prove to the American Government that approximately ninety percent of their income generation comes from natural resources, or real estate investments.They evade corporate income taxation from both the state and the federal levels because they are classified as partnerships.Entrepreneurs who operate under busy time schedules are advised to become limited partners in order to avoid bearing of extra managerial responsibilities.

Benefits of Master Limited Partnerships

i)        High Profits

Master Limited Partnerships result to high yields which make many entrepreneurs to get attracted to the investment. They mostly provide profits ranging between 6% and 7% of the total investment. This can be used as a way of funding businesses since the income obtained from the partnerships can be used to expand private businesses.

ii)                  Consistency in Awarding Distributions

These partnerships allow distributions to be made quarterly hence making it easy for the investors to predict the amount they are likely to receive. Therefore, it makes it possible for the entrepreneurs to plan for future business transactions depending on the amount they would get from the distributions. It also involves little unexpected expenses since the entrepreneurs are sure of the amount they would receive hence budgeting it effectively(Metrick, 2007).

iii)                Tax Exceptions

The Master Limited Partnerships protect the partners from being double-taxed. For the corporate investors, they are taxed both at corporate level, and at individual level. However, for the Master Limited Partners, tax is only levied on their distributions. Therefore, they are protected from paying the corporate taxes hence saving a lot of money. This amount can be used to boost their business operations. This initiative has encouraged many entrepreneurs within the United States to starting investing in Master Limited Partnerships.

iv)                Lower Capital Requirement

The Master Limited Partnerships require little capital in initiating development projects since they are not bound to paying a lot of taxes like the registered corporations. This enables them to grow rapidly since they find it easy engaging in development projects. They require little capital which can be obtained from their transactions hence eliminating the need for applying for business loans.

c)      New York City Tax Forgiveness Start-ups

The State Government of New York City introduced a tax forgiveness program in order to encourage entrepreneurs to invest more. This program was announced by Mayor Michael R. Bloomberg in 2012. According to a report which was compiled by the American Department of Labor (2012), the State government had helped more than 25,000 entrepreneurs to start and grow their business within a period of three years.

Rob Walsh, the Commissioner of New York Department of Small Business Services, said that between 2011 and 2012, the program had helped more than 1 200 families to secure jobs. This program involved allowing the new entrepreneurs to start their businesses and operate for a period of ten years without paying taxes.This motivated many potential entrepreneurs to start businesses hence improving the economy of the State.It was an effective way of financing businesses which was initiated by the State Government. It ensures that the entrepreneurs are given amble for generating enough profits which would be used to pay theirtaxes in future. Moreover, it enables businesses to have adequate period for learning the market needs in order to become successful before starting to pay taxes(Jaffe, 2008).

This program was devised after realization that most of the businesses in New York City became unsuccessful due to levying of high taxes by the State Government. Therefore, it was introduced in order to provide job opportunities for the New York Veterans. It helped many entrepreneurs to generate adequate income which would be used to cater for the business expenses and boost their transactions.

Differences among the three Ways of Financing Businesses

Business financing through the Small Business Administration Loans provides funds to entrepreneurs without having to force them to invest some of their capital in the program. They are helped by the federal agency to acquire loans from the trusted financial institutions. The agency gets involved in protecting both the welfare of the borrowers, and the lenders.

However, financing through Master Limited Partnerships requires the entrepreneurs to invest some of the capital in the organization in order to generate income in return. Unlike the Small Business Administration financing, the Master Limited Partnerships do not require lending of money. They allow the entrepreneurs to invest their capital in ownership of the partnerships in order to earn quarterly distributions in return. Therefore, each entrepreneur can easily predict the amount which he is likely to obtain from the partnership. However, in Small Business Administration Loans, profit generation is determined by the extent to which the loans were invested in transactions.

In Master Limited Partnerships, entrepreneurs are awarded opportunities to choose the kind of partners they want to become depending on their willingness to bear business responsibilities(Kieso, 2007). This differs from the other ways of business financing since entrepreneurs are entirely responsible for their fate in business. However, the New York City tax forgiveness start-ups programbenefitsthe new entrepreneurs mostly. It ensures that they are awarded amble time to learn the market patterns and generate adequate capital which will help them to cater for the expenses of their businesses. This method of business financing does not involve providing additional funds to the entrepreneurs. It focuses on providing favorable environment for the new entrepreneurs to succeed in business. This is achieved through reducing the burden of tax expenses for them for a period of ten years. It helps entrepreneurs to gain enough experience on how to survivecompetitions, and stabilize their businesses.

Difference betweenVenture Capitalists and Angel Investors

Venture Capitalists are people who provide funds for an already developed business in order to boost its practices, and acquire profits in return. They are only interested in making profits from the amount they provide. Therefore, they consider funding the promising businesses in order to ensure that they bear little risks(Ante, 2008).

On the other hand, Angel Investors are people who fund a business during its initial stage of development in order to help it to grow. They mostly get involved in the businesses which they have passion in in order monitor their progress keenly. Angel Investors take more risk than the Venture Capitalists. This is because they invest their resources in businesses which they do not know whether they will survive market competitions or not. Moreover, they do not provide financial resources only. They provide all the necessary resources which the businesses require in order to make their operations successful. They also take long periods before starting to enjoy profits from their investments since they have to wait until the businesses stabilize their operations.

However, the Venture Capitalists investigate the performance of a certain business in order to determine its likelihood of becoming successful before funding them.They are only committed to investing their financial resources in order to support business practices whereby they are assured of securing profits in return. They start investing after the businesses pass the stage of being funded by Angel Investors. Therefore, they are assured of starting to enjoy profits from their investments after short a period since the businesses would have already stabilized their practices.

The Angel Investors are bound to providing advice to the business managers in order to support its operations. Moreover, they are involved in decision making process of the crucial matters affecting the business(Berezin, 2005). They are also entitled to monitoring progress of the business in order to ensure that the proper amendments are made concerning its policy in order to promote its success.

However, the Venture Capitalists are only interested in the income generation of the targeted business. They do not provide any other help to the business apart from financial assistance. They ensure that they fully benefit from their investments without bearing a lot of risks. Therefore, they have fewer responsibilities compared to the Angel Investors who oversee the overall business progress.They are also not involved in most of the decision making processes except where they would be directly affected by the changes being anticipated for. They are majorly concerned with maximization of their profit generation rather than the overall practice of the business.

Conclusion

Businesses require adequate capital in order to support their practices and expand their transactions. In most cases, new businesses lack adequate capital for supporting their operations.They require financial support from other individuals and organizations. Therefore, they need to establish good relationships with the potential investors in order to acquire the required funds.

The Government of the United States has established mechanisms for taking care of the needs of the new entrepreneurs. They act as incentives which encourage more potential entrepreneurs to establish businesses. The State Government of the New York City has introduced a tax exemption program in order to enable the new entrepreneurs to reduce their expenses while conducting business.

This has enabled many entrepreneurs to establish business since they are allowed amble time for making enough profits before starting to pay taxes. The generated profits would be used to cater for the business expenses, and also boost their transactions.

Moreover, the Small Business Administration of the United States protects the welfare of entrepreneurs within the nation. It enables them to acquire partners, and link others with financial organizations from where they would obtain business loans. It also intervenes in order to ensure that both the lenders and borrowers benefit from each other mutually.This is achieved through recommending borrowers to the trusted lenders in order to ensure that they do not violate the terms of agreement after awarding of the loans. It also guarantees security of the lenders’ money through investigating the financial standing of the borrowers before allowing them to be awarded the loans.

Other entrepreneurs opt to engage in master limited partnerships in order to generate income from the amount theyinvest. They prefer this method of business financing in order to avoid paying corporate taxes which might become a setback towards their success. In this method, their commitment towards investing determines their success inincome generation. This makes them fully responsible for their fate in business.

Entrepreneurs opt to choose different alternatives of investing their resources in order to ensure maximization of their profits.Some prefer being Angel Investors in order to secure more profits after helping businesses to become successful while others choose to become Venture Capitalists. The Angel Investors are inclined to bearing a lot of risks which are associated with the progress of the businesses. However, Venture Capitalists are usually keen not to bear a lot of risks in their investments. They only target the promising businesses in order to lower their likelihood of incurring losses.

Therefore, other governments should emulate practices which would enable entrepreneurs within their territories to become successful. They should focus on ensuring that the new entrepreneurs are helped in coping with the market changes in order to stabilize their operations. They should also protect their rights in order to ensure that they do not get oppressed by chaotic lenders who might choose to violate the terms of agreement in awarding loans.

Work Cited

Ante, S. (2008). Creative Capital: Georges Doriot and the Birth of Venture Capital. Cambridge: Harvard Business School Press.

Berezin. (2005). Emotions and the Economy in Smelser. Princeton: Princeton University Press.

Hadzima, J. (2010). All Financing Sources Are Not Equal. Boston Business Journal, 34-67.

Jaffe, R. a. (2008). Corporate Finance. New York: McGraw-Hill Publishing.

Kieso, D. a. (2007). Intermediate Accounting. New York: John Wiley & Sons.

Loewen, J. (2008). Money Magnet: Attract Investors to Your Business. New York: John Wiley & Sons.

Metrick, a. A. (2007). Venture Capital and the Finance of Innovation. New York: John & Sons.