Business Financing — Importance, Types, and Sources

Finance is the heart and soul of any enterprise. It plays a vital role right from the establishment of a business to playing an important role in driving its growth. Today, business finance has come a long way from traditional methods of financing.

What is Business Financing

It refers to funds availed by business owners to meet their needs that may include commencing a business, obtaining top-up funds to finance business operations, obtaining finance to purchase capital assets for the business, or dealing with a sudden cash crunch faced by the business. Prominent loan providers have your back and provide finance to cater to the needs of your business.

Importance of Business Finance

The importance of finance cannot be sufficiently stressed. A couple of advantages of obtaining finance can be described as follows:

• Business finance can help entrepreneurs purchase land, capital assets and other assets without much difficulty and can focus solely on commencing the operations of the business.
• With access to finance, purchasing land and machinery, upgrading to the latest software and technology is easier, allowing you to walk towards ensuring the highest standards of quality in your industry.
• Access to business financing can help you deal with contingencies better without disrupting the operations of the company.

Types of Business Finance

The major types of business finance are outlined below.

#1: Equity Finance

In this type of finance, the investors are the owners of the company to the extent of their investment. Equity finance could consist of finance brought into the business by shareholders or owners. Typically, an investor contributes a large sum of money towards the business in exchange for a share in the business. When the business starts generating profits, investors earn the benefits depending on the number of shares they own.

#2: Debt Finance

Debt finance is what its name suggests. It is money that is borrowed from a lender and has to be repaid at a predetermined rate of interest over time.

Sources of Business Finance for Entrepreneurs

Obtaining business financing can be intimidating for entrepreneurs. It is a decision that should be taken with caution because it is bound to leave a deep impact on the finances of your business. In such a situation, exploring various sources of financing is extremely worthwhile. Finance can be classified based on various parameters and it is completely up to the entrepreneur to choose the right mix of finance for his business.

#1: External Funding

Through Debt

Entrepreneurs can rely on borrowings in the form of loans from lending institutions to cater to the unique requirements of their business. Depending on the lender’s policy and the type of loan, other eligibility criteria may also apply.

Through Equity

Entrepreneurs can pitch their business idea/projects to investors to request funding. If their pitch is accepted, then investors give them the capital they need in exchange for a share in the business.

#2: Internal Funding

Internal funds are generated by the owners of the enterprise in the form of preference shares, equity shares etc. It helps owners retain their control over the company in form of shares and therefore drive the major decisions relating to the company. It also helps them avoid taking on debt. However, this type of funding is possible only if the owner/promoter has sufficient funds to avoid approaching lenders or investors.

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