Financing is an important tool for any firm growth and required throughout the firm’s

lifecycle. The accessibility of fund has been highlighted as a central point in the
improvement, development and accomplishment of micro businesses. However, micro
businesses usually face obstacles to raise the funding; they consistently report higher
financing hindrances than large enterprises. Bank credit/lending is the most widely
recognised an outer source of money for some microbusinesses and business visionaries,
which are intensely dependent on conventional debt to satisfy their start-up, income and
investment needs. Financing techniques utilised by microbusinesses vary from initial internal
sources such as owner personal savings and retained earnings, to informal external sources,
comprising monetary help from family and companions, trade credit, venture capital and
angel investors as well as banks and securities markets.

Friends and Family and personal savings

When micro finance business owners face lack of capital, the first and foremost option is to
invest by himself from available sources and to seek help from his family and friends. This
kind of financing is considered as source of trust capital. Terungwa (2011) most micro
businesses raised their financing through their own funds from personal savings. Personal
resources can include profit-sharing or early retirement funds, real estate equity loans, or cash
value insurance policies. Financing from friends and family is very good alternative as the
investors solely purpose is not monetary and is ready to accept the lower or no interest on
their investments. Lee and Persson (2016) observed that financing from friends and family
has few downsides; risk remains within the social circle of owner and can affect the
relationship in negative way; another drawback is such kind of financing is limited.

Equity Financing

Equity financing is the process of purchasing stock in a company in exchange for a financial
commitment. According to Ou and Haynes (2006) equity capital is that capital invested in the
firm without a specific repayment date, where the supplier of the equity capital is effectively
investing in the business. An equity transaction gives the investor an ownership stake that
entitles them to a portion of the company's earnings. Equity entails a long-term investment in
a business that is not subsequently reimbursed by the business. An officially established
business entity should contain a proper definition of the investment. As in the case of a
limited liability company, an equity stake in a company can take the shape of membership
units, or as in the case of a corporation, as common or preferred stock. Companies may create
various stock classes to regulate voting privileges among stockholders. In a similar vein,
businesses might use various kinds of preferred shares. For instance, ordinary stockholders
have the right to vote, but preferred stockholders typically do not. However, in the event of
default or bankruptcy, common stockholders are last in order to receive the company's assets.
Prior to common stockholders, preferred stockholders receive a preset dividend.

Venture capital

Venture capital is one important source of finance for micro business. Venture capitalist
refers to an investor who invests by providing capital and support to small and medium
enterprises and entrepreneurs for expansion of their business who don’t have access to
equities markets. It refers to money invested in a business that could all be lost if it fails.
According to Potter and Porto (2007) venture capital is one kind of financing in which funds
are generated from investors and redeployed by investing in high-risk instructively obscure
firms which generally are start-up businesses. Venture capital investors favour making
investments in companies that are already successful and have received sizeable equity
investments from the founders. Further, venture capitalists prefer companies with a patent, a
track record of strong customer demand, or a particularly unique (and patentable) concept as
a differentiator or value proposition. A businessman starting a new company will likely
invest his own venture capital, but he will also likely need additional financing from
somewhere other than his own wallet. However, the phrase "venture capital" is more
explicitly related to investing money, typically in exchange for an equity stake, in a start-up
company, a management buyout, or a significant expansion plan. The institution that provides
the financing is aware of the risk involved. The complete investment is subject to a
significant risk of loss, and it might be some time before any profits or returns start to show.
However, the potential for extremely high earnings and a sizeable return on investment also
exists. A venture investor will demand a high expected rate of return on investments to offset
the high risk. A venture capital organisation will not want to retain its investment in a
business indefinitely, and when it considers putting money into a business venture, it will also
consider its "exit", that is, how it will be able to pull out of the business eventually (after five
to seven years, say) and realise

Angel Investors
Another source of finance for business is in the form of angel investors. Angel investors are
individuals and businesses that are interested in helping small businesses survive and grow.
Mason and Harrison (2008) supported by Sohl (2012) defined angel investors or business
angels as those people who have high net worth, willing to invest in new businesses without
having any personal family relationships, in order to have some stocks in that business. Their
objective may be more than just focusing on economic returns. Although angel investors
often have somewhat of a mission focus, they are still interested in profitability and security
for their investment. Business angels play a vital role in micro business financing by
providing the small amount of loans to the firm in the early stages of its growth. Sohl (2012)
business angels assist firms to increase the flow of finance by contributing directly. The
major drawbacks of using business angels as a source of finance is that it takes long time to
find the appropriate angel investor and that the owner has to give up some of his business
share. Mondal and Shrivastava (2016) noted that many investors often ask for certain share in
company’s stake. Angel investors may be interested in the economic development of a
specific geographic area in which they are located. Angel investors may focus on earlier stage
financing and smaller financing amounts than venture capitalists.

Trade Credit

Trade credit is an alternative way of financing micro finance business needs. Huyghebaert
(2006) argued that trade credit emerges when a company purchases good and services on
deferred payment which gives them a short-term credit where payment becomes due in thirty
to sixty days. However, if payment is not made within the stipulated time period, interest
charges are imposed and becomes a source of financing. Trade credit financing is the most
external significant approach of micro business financing in almost all developed and
developing countries according to Demirgüç-Kunt and Maksimovic (2002). Trade credit
naturally arises directly from ordinary business transactions. On the downside, if payments
are not paid within the required credit window, trade credit can become an expensive way of
financing. Wilson and Summers (2002) highlighted that the cost of credit is generally
assigned into the cost of goods sold on credit, which indirectly makes trade credit an
expensive financing approach. The period of trade credit is limited and suppliers may be
reluctant to stretch the credit period further.

Debt Financing
 It is a fact that a business can use debt financing as a source of capital. Debt financing
involves borrowing funds from creditors with the stipulation of repaying the borrowed funds
plus interest at a specified future time. According to Hisrich and Peters (1995) debts are
described as funds borrowed to be paid in future specified time period with interest amount.
For the creditors (those lending the funds to the business), the reward for providing the debt
financing is the interest on the amount lent to the borrower. Debt financing may be secured or
unsecured. Secured debt has collateral that is a valuable asset which the lender can attach to
satisfy the loan in case of default by the borrower. Conversely, unsecured debt does not have
collateral and places the lender in a less secure position relative to repayment in case of
default. Debt financing (loans) may be short-term or long term in their repayment schedules.
Generally, short term debt is used to finance current activities such as operations while long-
term debt is used to finance assets such as buildings and equipment.

Retained earnings

For any company, the amount of earnings retained within the business has a direct impact on
the amount of dividends. Profit re-invested as retained earnings is profit that could have been
paid as a dividend. The major reasons for using retained earnings to finance new investments,
rather than to pay higher dividends and then raise new equity for the new investments the
management of many companies believe that retained earnings are funds which do not cost
anything, although this is not true. However, it is true that the use of retained earnings as a
source of funds does not lead to a payment of cash.

Further, the dividend policy of the company is in practice determined by the directors. From
their standpoint, retained earnings are an attractive source of finance because investment
projects can be undertaken without involving either the shareholders or any outsiders. The
other benefit of using retained income is that the use of retained earnings as opposed to new
shares or debentures avoids issue costs. Moreover, the use of retained earnings avoids the
possibility of a change in control resulting from an issue of new shares.

Lease

A lease is an agreement between two parties, the "lessor" and the "lessee". The lessor owns a
capital asset, but allows the lessee to use it. The lessee makes payments under the terms of
the lease to the lessor, for a specified period of time. Leasing is, therefore, a form of rental.
Leased assets have usually been plant and machinery, cars and commercial vehicles, but
might also be computers and office equipment. There are two basic forms of lease: "operating
leases" and "finance leases".

A lease is a method of obtaining the use of assets for the business without using debt or
equity financing. It is a legal agreement between two parties that specifies the terms and
conditions for the rental use of a tangible resource, such as a building or equipment. Lease
payments are often due annually. The agreement is usually between the company and a
leasing or financing organization and not directly between the company and the organization
providing the assets. When the lease ends, the asset is returned to the owner, the lease is
renewed, or the asset is purchased. A lease may have an advantage because it does not tie up
funds from purchasing an asset. It is often compared to purchasing an asset with debt
financing where the debt repayment is spread over a period of years. However, lease
payments often come at the beginning of the year where debt payments come at the end of
the year. So, the business may have more time to generate funds for debt payments, although
a down payment is usually required at the beginning of the loan period.

In conclusion micro businesses can be funded internally and externally. Internally generated
funds include investment profits, sales of assets, extended payment terms, reduction in
working capital and accounts receivable; whereas, external sources are firm owners,
companions and relatives, banks and financial institutes, suppliers and merchants,
government and non-government offices.
References

Hisrich, R.D. and Michael P. P. (1995). Entrepreneurship: Starting, Developing and

Lee, S., and Persson, P. (2016). Financing from family and friends. The Review of Financial
Studies, 29(9), 2341-2386.

Ou, C. and Haynes, G. W. (2006). Acquisition of additional equity capital by small firms–
findings from the national survey of small business finances. Small Business Economics,
27(2), 157-168.

Huyghebaert, N. (2006). On the Determinants and Dynamics of Trade Credit Use: Empirical
Evidence from Business Start‐ups. Journal of Business Finance & Accounting, 33(1‐2), 305-
328.

Wilson, N., & Summers, B. (2002). Trade credit terms offered by small firms: survey
evidence and empirical analysis. Journal of Business Finance & Accounting, 29(3‐4), 317-
351.