State and explain two sources of business finance that may be used to launch a business.
Equity Financing: This is a source of financing business using the
owners’ finances. Thus, equity financing represents the business owners’
interest in the business and it gives him/her some residual claim on the
cash flows. It has infinite life in the business. However, equity financing
does not have any priority in liquidity. No interest is paid nor is security
required when investing the money into the business.
Debt Financing: This is a source of business financing using money
which is borrowed and which has an element of risk associated with it.
Debt financing has a contractual claim on the cash flows of an enterprise.
Thus, debt financing carries with it commitment to repay the principal
sum and the interest according to the agreed schedule.
Business financing may be obtained from two main sources; Equity financing
and debt financing.