Sources of Finance for Sole Traders & Partnerships
stocks and shares image by Andrew Brown from Fotolia.com
Sole traders and partnerships refer to the the simplest forms of business organisation. A sole trader is an individual who runs a business from his own name, providing all the capital and assuming all the risks. A partnership can include more than one individual,.
Partnership members carry out a business in common in pursuit of a profit. Both sole traders and partnerships carry unlimited liability (except for the Limited Liability Partnership)--if the business goes bust, its owners can be forced to compensate for any unpaid debts of their business from their own pockets.
- Sole traders and partnerships refer to the the simplest forms of business organisation.
- Both sole traders and partnerships carry unlimited liability (except for the Limited Liability Partnership)--if the business goes bust, its owners can be forced to compensate for any unpaid debts of their business from their own pockets.
Sole traders and partnerships have a range of options to get finance: personal savings, retained profits, working capital, sale of assets, and bank loans.
Put simply, personal savings is the the amount of money a person has at his disposal. It becomes a source of finance when the sole trader or a partnership member is willing to invest it in his business. It is up for the individual to decide whether he wants to keep his savings or use them to buy equipment, vehicles, tools or other things his business's needs.
A business exists to make profits. Those profits can be either withdrawn by the owners of the firm or reinvested to expand the business. If a sole trader or partnership members decide to keep the profit for the company, this source of funding is called retained profit.
- A business exists to make profits.
- If a sole trader or partnership members decide to keep the profit for the company, this source of funding is called retained profit.
Working capital is the short-term finance or capital of a business. It is calculated by subtracting current liabilities--how much a firm owes--from current assets--how much money the company has or is owed. Using working capital to cover short-term finance needs amounts to another source of finance.
Sale of Assets
If a sole trader or a partnership needs money, it can dispose of some of its assets, selling machinery, land, buildings, tools and other assets not vital for the existence of a firm. However, assets normally are required for a business to expand, and so selling them can only be a temporary source of finance.
Taking a loan from a bank amounts to yet another source of funding available to sole traders and partnerships. However, as these forms of business organisation have unlimited liability, a person taking a loan for his business is responsible for its repayment. If the business goes bankrupt, he will still have to pay the loan back.
Eliah Sekirin started writing newspaper articles in 2003. His work has appeared in "Junij Poliyehnik" and on Web sites such as Prepodi.com. His writing interests are business, finance, economics, politics, arts, history, culture and information technology. Eliah holds a Bachelor of Science in econometrics from Kiev Polytechnic Institute.