Blog on Business Finance
Do you ever wonder what finance is in business? In case you are a business owner or are planning to become one, you may already be familiar with the importance of business finance. The role of finance is crucial to the success of any business. To start and operate a business, you need capital, and Business Finance helps you get that capital.
Business Finance is the one area where entrepreneurs must invest a majority of their time and energy, compared to any other aspect of running their business. Businesses that thrive are not necessarily those with the highest quality products or the most efficient services. Instead, it is the business that has the most capital.
What is Business Finance?
Business Finance refers to the funds that a business needs to establish itself, provide for all business activities, and to expand it in the future. Renting office space, paying employees, paying for raw materials, and purchasing machinery and long-term assets are all required for a business to function.
Business Finance can be used to maintain furniture, machinery, buildings, offices, and factories, as well as intangible assets such as patents, trademarks, and copyrights.
Aside from the assets listed above, the day-to-day activities of a corporation also require cash. Purchasing raw goods, paying bills, paying employees, and collecting money from clients are all examples of this activity. To sustain and expand a business, you must have a significant amount of money.
· Long-term Financing – Long-term financing refers to financing for a business that is available for more than five years. As an example, a company can generate long-term funding by selling shares.
· Medium-term Financing – Medium-term funding is less than five years but more than one year. A bank or financial institution may issue medium-term loans or lease financing, as well as take public deposits or issue commercial paper.
· Short-term Financing – The purpose of short-term financing is to meet the needs of businesses that are not going to last more than one year. A business, for instance, can pay current liabilities with a working capital loan, including an overdraft facility or a line of credit.
What is a finance committee?
A finance committee is responsible for making major financial decisions in large companies. Among other things, they are in charge of the annual budget. While, in small companies, the owner-manager conducts the financial operations all by themselves. The lower-level staff is responsible for the day-to-day operations of business finance. They work in the sections that handle cash, receipts, disbursements, and borrowings from commercial banks. It takes place on a regular and continuous basis. They also form cash budgets.
Why Business Finance is necessary?
A business or enterprise can't run without money. For a business to grow and operate a business, one must have sufficient cash flow. During the startup phase and throughout the business cycle, all businesses will require business finance.
Some of the benefits of obtaining finance are as follows:
· With the help of business finance, entrepreneurs will be able to kickstart their businesses. As a result of this financial assistance, they can easily purchase land and company assets that are necessary for their day-to-day operations. In addition to relieving them of cash concerns, they would also be able to concentrate solely on starting up their business.
· The owner's capital may not be enough for them to start their dream business. Business finance enables entrepreneurs to purchase the latest technologies and machinery. It will ultimately benefit the industrial sector by improving its infrastructure and production.
· The availability of business finance is a significant relief for entrepreneurs in times of crisis. By doing so, they would be able to meet these sudden cash needs without compromising their business assets or personal properties.
Types of Business Finance
Equity finance involves providing financial assistance in exchange for assets to businesses. Depending on the investment made by the investor, the investor becomes a shareholder of the company. Investors or owners who have made equity investments are considered to have made equity investments. When investors provide equity finance, they provide monetary assistance to purchase company shares. After the business begins to prosper, they will gain a profit on the investment.
Money sourced from outside the business is considered debt finance. During an emergency, entrepreneurs can apply for bank loans or other forms of emergency capital. Whenever entrepreneurs borrow money from the bank, the borrower will be expected to pay interest. In this case, the bank won't own any shares of the company. There should be a fixed interest rate and repayment period agreed upon before the borrower takes out the loan.
Sources of Business Finance
Financing a business can become a challenge for entrepreneurs, regardless of their experience level. Financing a business involves a number of ties that should be carefully considered by the owner. To determine which type of financing works best for their business, entrepreneurs should examine all types of business financing.
All debt financing and money access require external funding. External funding can originate from banks and lending institutions. External funding can be described as money taken as a debt in return for interest. Funding from outside sources is beneficial when you don't want to sell company shares but need money to meet cash shortages. If you apply for External Funding, you may be required to pledge company assets as collateral.
Financial institutions are the most popular source of external funding for business finance. Financial institutions provide cash loans to businesses for their growth and development. The criteria for a bank loan can include eligibility, past debt, loan amount, interest rates, tenure, and more. In order to establish a business, large amounts of money are given.
Outside investors can also provide entrepreneurs with money. They can pitch their business idea or project to investors and request financial assistance from them. In exchange for financial assistance, investors can purchase shares of the company to contribute to the cause.
Businesses' internal funds can be increased by their owners. This method is relatively safe because it allows owners to retain their control over the company. Additionally, it can help them avoid huge debts and high-interest rates.