what is business finance

Money is required to meet contingencies

Funds are important to solve or prepare the business for unforeseen problems. Problems like shortage of raw materials can be solved if the business person prepared himself and had used the money to stock raw materials for a rainy day.

Funds are required for sales promotions

Because of constant competition, money is required for advertising of the products to promote the brand name and create market recognition to boost sales. The basic principles of finance categorize business finance needs into long-term, short-term and medium-term needs.

Long-term business finance

These are funds that are required for the purchase of fixed assets like land and machinery that are required for a long period of time, generally 5 years or more. Examples of the fixed capital that is purchased by long-term finances are items like land, furniture and machinery that is durable and is going to be used in the business for a considerable period of time. They may also include funds that are required to finance the working capital which is permanently required.

Short-term business finance

These are funds that are required to finance day to day operations. Unlike long-term finance requirements, the need for short-term finances varies with the length of the operating cycle of the business. These funds make up the current assets that are considered to be the working capital of the business. They are in the form of cash or items that can be easily converted to cash. It is used to maintain a minimum level of stock and to pay salaries of the employees in the business.

Sources of business finance

There are two main sources of finance

Debt

This is money borrowed from external lenders such as banks.

Equity

Investing your own money from other stakeholders in exchange for proportionate ownership.

The main sources of debt finance are;

Financial institutions like banks, credit unions and lines of credit. Borrowing from financial institutions incurs costs that vary from institution to institution but generally are interest rates, application fees, ongoing fees and charges and insurance costs.

• Retailers that allow purchasing of goods through store credit through finance companies
• Suppliers that allow you to delay payment of goods
• Factoring companies who sell their invoices and accounts receivables to third parties and receive the payment directly from the customers.
• Family and friends who are willing to support financing your business.

The main sources of equity finance are;

Venture capitalists who invest large sums of money into businesses that have a potential for rapid growth.

Family and friends who have the financial muscle and will to back your business in exchange for a share of it.

Private angel investors who are wealthy individuals that seek to invest huge sums of money in return for a share of the profits to be made.

Crowd funding in online platforms to bring investors who would part with their money in exchange for equity together.

Government grants that occasionally support particular industries and projects.

Disadvantages of debt as a source of finance

It may be difficult to grow the business due to the cash drain of repaying the loan. The loan is often secured with collateral which may be personal property or assets of the business.

Disadvantages of equity as a source of finance

Investors in your business may require having a say in your business decisions. It takes time and effort to get the right investors for your business.

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