Finance is the foundation of a business. Business finance is the funds and loans used to run a business. Finance is required to purchase goods, raw materials and assets needed in the business.
A business cannot survive without money. This money, also known as business finance, is used for doing projects in the business. It is the backbone of a business or enterprise. A business is nothing without adequate access to money available for use.
Business finance is concerned with the raising and management of funds by business organization. It relates to how an organization or business manages its debt, credit, and investments.
Capital is not the only amount required to run a business. It is in fact, not enough. To successfully handle the responsibilities and needs in the business, a business owner must search for finance options so as to generate fun. Searching for funds or finance options must be goal-oriented. This allows the business owner to manage and properly plan the use of the fund, when gotten. Financial decisions can have negative or positive implications on a business.
There are many reasons a business may need finance. It could be to buy assets, buy raw materials necessary for production, could be for the general development of the business, and it could be to pay workers salary and other vital requirements in the business. A business could require money for four kinds of things, and they are:
Fixed assets like land, buildings, plants, machinery and equipment are vital requirements to begin a business. Getting the right business finance to set up your business is essential.
Money is the backbone of a business. Every business need money to survive. Business finance can be required for the day to day running activities of a business such as purchase of raw materials, salaries, rent and taxes.
Expansion and Diversification
The goal of every business is to grow, and expand. Money is required to do this. When a business has access to business finance, it can diversify and expand its activities.
Upgrading of the Business
In modern day world, technology advancement is important to the growth of the business. Businesses need finance to adopt the latest technology that can help in the upgrade of the business.
Types of Business Finance
The soul of your business is finance. However, not all finance options are necessary or your business. Depending on the needs of your business, there are types of finance that you may have to consider.
When you need fund for your business within a short period of time, usually a year or less, this is known as short-term finance.
This type of finance has low interest rate, easy to get and require little or no documents.
However, short-term finance is for small amount of money and the term of repayment is always fixed.
This type of finance can be considered when long-term finance is not accessible. The loan period is usually for medium term, usually between three to five years.
This type of finance is accessible for a period of more than 5 years to 10 years. It can be considered for long-term business needs like expansion.
Sources of Business Finance
Are you looking to start a business or expand on your current one? Money is the most vital tool needed for a business. Raising enough money to start and manage a business is important.
There are various sources of business finance. Each one is unique and can give you the necessary financial backing you need to fund your business. They include:
Business loans allow you to borrow a certain amount of money with agreement to pay back over a period of time, with interest. There are two major types:
Secured business loan
A business owner trying to finance their business with a secured business loan must have security. This security serves as collateral against the loan. The loan provider can repossess the collateral if you default in the repayment of the loan.
Unsecured business loan
You do not need to have any collateral to take this loan. Depending on your credit history and financial situation, a loan vendor may decide to give an unsecured loan.
Business loans can be used for medium and long-term purposes as they are not repaid over a short period of time. The repayment is spread over a term with relatively low interest rates, depending on your financial situation.
Businesses looking to expand can also apply for business loans. This is because as long as the loan is repaid, their businesses are not affected.
Invoice financing is taking a loan in good faith that your customers will buy into your business so you will pay off the loan.
There are two forms of invoice finance – invoice factoring and discounting.
This type of business finance is only available to companies with high revenues and paying-customer base.
Business overdraft is also called bank overdraft. It is a good finance options for short-term business needs. An overdraft allows businesses spend beyond the balance in their current account.
There is always an agreed limit which the business can go after exceeding its current account balance and for large overdrafts, you may be required to put up some collateral.
However, the interest rate is high and an overdraft can be revoked. This makes it an ideal short-term finance option.
Business credit cards
This is also a short-term finance option. It is commonly used by small businesses. It is a contract backed agreement.
Companies use the credit card for business-related expenses at zero interest. The outstanding balance is paid by the end of the agreed period. This is usually a month to 2 months later.
Using a credit card helps to increase a business’ credit history.
Startup loans are a form of personal loan however backed by government or organizations. It is a finance option available for new businesses or businesses looking to expand. This form of loan comes with business mentoring opportunities.
This is another form of secured loan. Businesses looking to expand can invest in buying properties, and using those properties as collateral for a loan.
This type of finance option has a loan term of as long as 25 years. It is high risk, but the interest rates are better compared to other business loans. The interest rates are also tax-deductible
Some businesses require high-powered vehicles, machines and equipment to function. Asset finance is a finance option that business can use to purchase this equipment.
Asset finance requires that the borrowing companies use the asset they want to buy or bought as collateral for the loan. Hire purchase is a form of asset finance.
Hire purchase is a form of asset finance that allows companies purchase an asset with the fund provided by a finance vendor. The money is repaid periodically over a period of time at a fixed loan rate with small interest rates.
This type of finance option is ideal for long-term business needs. However, ownership of the asset is not transferred until the full payment is made.
Crowdfunding involves getting small financial helps from a large number of people.
This type of finance option is ideal for any business looking to start or grow.
Grants are usually awarded by the government, a government organization or Non-governmental organizations.
This type of finance option is difficult to apply for, competitive, and require specific requirements.