Limitations on finance for unincorporated businesses

Unincorporated businesses, such as sole traders and partnerships, face specific restrictions when seeking finance.

Key restrictions on raising finance

• Inability to sell shares - Sole traders and partnerships cannot issue shares.
• Challenges with debentures - These businesses are unlikely to be successful in selling debentures due to being relatively unknown firms.
• Impact of unlimited liability - All owners or partners are personally liable for business debts, making lenders often reluctant to offer loans without personal guarantees.
• Reliance on personal resources - Owners may have insufficient personal savings to invest in their business.

Available sources of finance for unincorporated businesses

Despite restrictions, unincorporated businesses have access to various funding options suited to their needs.

Common sources of finance

• Bank overdrafts and loans - Traditional banking facilities including overdrafts and term loans.
• Microfinance - Small loans targeted at entrepreneurs excluded from traditional banking.
• Crowd funding - Online platforms that allow multiple small investors to fund business ventures.
• Trade credit from suppliers - Credit arrangements with suppliers (trade payables).
• Loans from family and friends - Informal lending arrangements with personal contacts.
• Owners' investment - Personal capital invested by the business owner.
• Taking on partners - Bringing in new partners who contribute capital to the business.
• Government grants - Financial support from government schemes for small and newly formed businesses.

The role of microfinance as a funding option

Microfinance offers small loans to entrepreneurs who might otherwise be excluded from traditional banking.

Features and benefits of microfinance

Microfinance provides small capital sums to entrepreneurs and is an important source of finance in developing, relatively low-income countries.

Historical development:

• In 1974, Muhammad Yunus lent $27 to poor villagers in Bangladesh who repaid the loan after successful business ventures.
• Yunus founded the Grameen Bank in 1983, making very small loans to poor people without bank accounts.
• The Grameen Bank has lent $6 billion to more than 6 million Asian people.

Impact and reach:

• Evidence shows entrepreneurship increases in regions with microfinance schemes.
• In some countries, more than 75% of successful microfinance applicants are women.

Drawbacks of microfinance

• High interest rates - Due to administration costs of processing small loans.
• Risk of debt - Potential debt burden for failed ventures.

The features and challenges of crowd funding

Crowd funding has become an increasingly popular way for unincorporated businesses to secure startup capital by appealing directly to a large audience online.

Key features of crowd funding

Crowd funding operates through online platforms like Kickstarter and Crowdcube, allowing entrepreneurs to promote business ideas to thousands of potential investors who commit small sums until target funding is reached.

Benefits of crowd funding:

• Provides publicity that serves as promotion for the new business.
• Offers an increasingly significant source of finance for new business start-ups.

Investor returns:

• For successful ventures, investors receive either initial capital plus interest (peer-to-peer lending), or an equity stake and share in profits.
• Some ventures like social enterprises may receive funding as donations without returns.

Challenges associated with crowd funding

• Investor management - Managing records of numerous investors can be complex.
• Idea protection - Risk of business ideas being copied by competitors.