Table of Contents
Introduction
Every business needs money to start, operate, and expand. The money used by a business comes from different sources and through different means.
These means are known as instruments of business finance. Understanding them helps us know how businesses raise and manage money.
Instruments of business finance are the various methods, tools, or means through which a business raises funds for its operations.
They show how money is obtained to start a business, buy equipment, pay workers, and expand production. Examples include shares, debentures, loans, and retained profits.
Capital
Capital is the money or wealth used in starting and running a business. It includes cash, machines, buildings, and tools used for production.
Raising of Capital
Capital can be raised through:
- Personal Savings: Personal savings refer to the money the business owner sets aside from personal income to start or support the business.This is common with sole proprietorships and small businesses. It is easy to use because no interest is paid and no permission is needed, but the amount available is often limited.
- Sale of Shares: A company can raise capital by selling shares to the public. People who buy these shares become part owners of the business. This method helps a business raise a large amount of money without borrowing, but shareholders may take part in decision making and expect dividends.
- Bank Loans: Businesses can raise capital by borrowing money from banks and other financial institutions. The loan is usually repaid with interest over a period of time. Bank loans can provide large sums of money, but high interest rates and strict conditions may make repayment difficult.
- Debentures: Debentures are long term loans obtained from the public. The business agrees to pay interest regularly and repay the money at a future date. This helps companies raise funds without giving up ownership, but the fixed interest payment can be a burden.
- Retained Profits: Retained profits are profits that are not shared as dividends but are kept back for business use. This source of capital is cheap and safe since no interest is paid. However, it depends on how profitable the business is.
Types of Capital
- Fixed Capital: This is money used to buy long lasting assets such as buildings, machines, and vehicles.
- Working Capital: This is money used for day to day running of the business, such as paying wages, buying raw materials, and paying bills.
Stock
Stock refers to the total shares of a company that have been issued to the public. It represents the combined value of all the shares owned by shareholders. Stock is usually traded on the stock exchange.
Debentures
A debenture is a long term loan taken by a company from the public. It is a written agreement that the company will pay back the money with interest at a fixed time.
Types of Debentures
- Redeemable Debentures: These are debentures that are paid back after a specified period.
- Irredeemable Debentures: These are debentures that are not repaid during the lifetime of the company.
- Secured Debentures: These are debentures backed by assets of the company.
- Unsecured Debentures: These are debentures not backed by any assets.
Problems of Business Finance in Nigeria
Businesses in Nigeria face several financial problems, including:
- Lack of Adequate Capital: Many businesses in Nigeria do not have enough money to start or expand their operations. This is often due to low income levels and limited access to financial institutions. As a result, businesses may operate on a very small scale and struggle to compete.
- High Interest Rates: Interest rates charged by banks in Nigeria are usually high. This makes borrowing expensive for businesses, especially small and medium scale enterprises. High interest rates increase the cost of repayment and can reduce business profits.
- Poor Access to Bank Loans: Most small businesses find it difficult to obtain loans from banks because of strict requirements such as collateral, guarantors, and detailed records. Many business owners cannot meet these conditions, which limits their access to funds.
- Economic Instability: Frequent changes in prices, inflation, and exchange rates create uncertainty for businesses. Economic instability makes it difficult for businesses to plan properly, save money, or repay loans on time.
- Poor Saving Culture: The level of savings among individuals and businesses in Nigeria is generally low. Low savings reduce the amount of funds available for investment and lending, making it harder for businesses to raise capital internally.
- Unfavorable Government Policies: Some government policies such as high taxes, multiple levies, and sudden policy changes affect business financing. These policies increase business costs and discourage investors and lenders.
Summary
Instruments of business finance explain how businesses raise funds. These include shares, capital, stock, and debentures. Understanding these concepts helps us know how businesses operate and overcome financial challenges.
Tags
Capital, Fixed capital, Working capital, Raising of capital, Stock, Stock exchange, Debentures, Redeemable debentures, Irredeemable debentures, Secured debentures, Unsecured debentures, Interest, Ownership, Investment, High interest rate, Collateral, Economic instability, Inflation, Government policies, Saving culture
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