Every enterprise or business relies heavily on finance. Right from the start of a business, it plays a crucial role in its growth. Business finance has evolved a lot of traditional methods of financing. Let’s explore what is business finance in more detail:
The term finance refers to the management of money and the process of acquiring funds. Banks, leverage, debt, credit, capital markets, money, and investments are all part of finance.
Business finance describes the funds and credit availed by business or company. Business finance helps business owners to manage the funds/money to make your business more profitable by considering financial statements such as profit and loss accounts, balance sheets and cash flow statements.
The smooth running of a business depends on funds and credit. Every business relies on finance. It follows that a business has plenty of financial necessities, such as raw materials, goods, and assets. Essentially, business finance refers to funds that are availed by business owners to meet their needs. For instance, they may start a company, obtain top-up funds for business operations, obtain financing to purchase capital assets, or to deal with a sudden cash crunch. There are prominent loan providers who provide finance to meet your company’s needs.
According to Wheeler, “Business finance is that business activity which is concerned with the acquisition and conversion of capital funds in meeting financial needs and overall objectives of a business enterprise”.
Why do you need business financing?
In business, goods are purchased and sold in order to produce wealth. Business is fueled by finance. In order to start and run a business, funds are required.
The planning, organizing, managing, controlling, purchasing, selling, directing, marketing, and many other aspects of business cannot be performed without the support of finance. We can therefore say that business finance refers to a company’s requirements for obtaining funds to carry out its various activities.
In order to establish a business, an entrepreneur requires capital to cover the expenses for startup, to purchase fixed and current assets for day-to-day operations, to buy raw material, to pay salaries, etc. Having sufficient funds allows a business to operate smoothly, expand, and grow.
Financial importance cannot be overstated. Here are a few advantages of obtaining finance:
- Having access to business finance can enable entrepreneurs to purchase land, capital assets, and other assets without much difficulty, allowing them to focus exclusively on establishing and operating their companies.
- When you have access to finance, land and machinery, upgrading to the latest software and technology is much easier, allowing you to meet the highest standards of quality.
- Financial access can make it easier to deal with contingencies without disrupting operations.
What are types of business financing?
Business finance can be divided into three types:
1.Short term finance
The term “short-term finance” refers to financing the business for less than one year. This type of financing is also known as working capital financing. Invoice discounting, factoring, and business line of credit fall under the category of short term finance.
There are several advantages to short-term finance, including lower interest rates, quicker disbursements, and minimal documentation required.
The main disadvantages of short term finance are the small amount of money we receive, the fixed payback period, and the ever-increasing interest rate.
2. Medium term finance
Medium term finance can be availed in two scenarios, when long term capital is not available, and when deferred revenue expenditures are written off within three to five years.
A medium-term loan is usually for three to five years. Medium-term finances include preferred shares, bonds, lease financing, etc.
Short-term loans carry less risk than long-term loans, but are more conservative than long-term loans. Risk and return are often balanced in medium term finance.
3.Long term finance
Long term finance is provided for a loan period of more than ten years. Long term finance is also referred to as fixed capital finance. Long-term finance includes equity, preference capital, debt instruments, term loans, and retained earnings.
The main goal of getting this kind of financing is to expand the business so that it can reap greater economic benefits in the future.
What are the different sources of business finance?
1. Banks and Financial institutions:
Individuals and businesses can deposit, save, invest, and manage their monetary resources through financial institutions, which provide a variety of financial services.
Business loans are a great way to meet your business expenses. There are only a few simple eligibility criteria and documents to submit.
2.Invoice Financing :
Invoice financing is alternatively known as “accounts receivable financing” or just as a “receivables financing.”
By financing invoices, businesses can borrow money against the amounts due from customers. Businesses use invoice financing to improve cash flow, pay employees and suppliers, and reinvest in operations and growth sooner than they could if they waited until their customers paid.
Upon borrowing money, businesses pay a percentage of the invoice amount to the lender. A business with difficulties obtaining other types of credit may find invoice financing beneficial to solve their payment problems.
Several financial institutions offer invoice financing loan to help businesses deal with cash flow problems.
3. Angel investors and venture capitalists:
Equity capital is another form of business financing. Start-ups or new businesses might not have adequate business vintage to qualify for a loan. Angel investors and venture capitalists can help you with financial aid in this situation. In exchange for equity and profits, these investors provide funding.
4. Inventory financing:
Using inventory as collateral, a company can obtain a secured loan. If your small business doesn’t have access to other financing options, this is a good option for you.
5. Business credit cards:
For urgent business needs, this is one of the most convenient sources of finance. It is an unsecured credit facility that does not require collateral.