FIN/575 Sources and Uses of Business Finance

Finance and Accounting Name of Student Name of Institution Finance and Accounting Stages of Financing and Sources of Financing through the Lifecycle of a Firm Firms have different stages. Each stage has different needs for finance. As such, business owners would consider different sources of finance. Each source of finance for a firm has its costs and consequences. When considering raising finance for business, an entrepreneur should assess the business’ finance needs against the costs of finance for each source. The entrepreneur should also consider other consequences of using the different sources of finance. For instance, loans attract interest. The entrepreneur using debt financing should therefore consider the effect of the interest expenses on the business. The sources of financing for a firm depend greatly on the stage in which it is in its lifecycle. A firm goes through five main phases in its lifecycle and these determine its capital and finance needs. That ultimately influences the choice of financing options. The first phase of a firm is the concept stage. Here, the entrepreneur is still developing an idea into a concept for a business (Bellativis, Filatotchev, Kamuriwo and Vanacker, 2016). The stage requires minimal financing. As such, the sources of financing match the finance needs for the entrepreneur. Under the concept stage, the entrepreneur uses their own finances or gets small loans from friends or family members. The choice of source is guided by the low need for finances. The second stage of the firm is the seed face. Here, the entrepreneur sets out to make the firm a legal entity and prepare to start operating. As such, the entrepreneur needs more funds to cater for the increasing costs. While some entrepreneurs may still use their own funds or borrow from family members and friends in this stage, there are more sources to consider under this phase. Other sources of financing for this stage may include government grants and accredited angel investors (Mac an Bhaird and Lucey, 2011). The pool of sources of finance expands because there is greater need for funds to fund the validation of the concept, developing the product, as well as defining the market. While raising finance from family members, friends and government grants may not have a huge impact on how the firm runs, finances from angel investors come with some strings. The entrepreneur may have to cede some manageme...

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