Essence of Business Finance

Updated on June 11, 2022, 9:46 a.m.

People require money to purchase goods, equipment and raw materials for establishing their business enterprise. There are two options; you may need your business capital in savings or coming from an investor. Business finance is also known as Corporate Finance in the modern business world.

Let me break down the complex concept of Business Finance. It is a process dealing with raising, allocating, and managing funds by business enterprises in a logical manner. If you look at complete concept of financing, it is the process of providing the money for business activities, Like Investing, Purchasing the equipment, taking care of shareholders and others.

Financial Institutions like banks offer the money to investors, business owners, entrepreneurs and consumers to achieve their goals. For the business to succeed, finding the correct funding source is vital. If you take money from the wrong source, you will lose part of the money or find yourself in a repayment mode, affecting your growth for many years to come. 

Sources Of Business Finance

Business finance has many sources and some of the chief sources of the business finance are given below as under:

Retailers: They purchase the goods for your business enterprises, through store credits. Let me explain the store credits, where in you make purchases on the card, and make the payment within the agreed time frame. Some retailers offer interest free period on store credits.

Suppliers: They know the business owner very well because of the personal networks and will have a strong bond. Furthermore, they will supply the goods and offer concessions in payments depending upon the financial situation of the owners. Furthermore, they will also offer good offers for you. In other words, they will allow you to delay the payment for the products and services taken.

Family and Friends: These are the people; you meet day in and day out in the streets, pubs, parks, theatres, malls and other places.  They may or may not give financial assistance, depending on their situation at that moment when you ask the money. However, they can be counted upon in giving your assistance. Money taken from friends or family members (or insiders) comes under this section. You can return the amount, when your financial situation improves, and in some situations, they may waive off the loans given to you as a gesture of goodwill.

Financial Institutions: It is an establishment comprising the Banks, Building Societies, Finance Companies and Credit Unions that help in setting up the business enterprise. The Finance assistance can be provided using Line of Credit, Loans, and Overdraft facilities. They ask for your documents like the Property Documents, Source of Income, Check Your Financial Ability, Repaying Capacity and others. This comes with lot of conditions, where in one need to pay on or before the due date to avoid interest charges.

Types Of Business Finance

Debt Finance: You can consider this as the money borrowed from banks and financial institutions by a company to be paid back at a future date with certain rate of interest. You must pay the loan within the stipulated time to avoid the interest rates. The payment will be made monthly, half yearly or towards the end of the year, depending upon the financial ability of the owner of the establishment.

After the loan is approved, the repayment of the loans starts and interest on the loans is deductible. This applies to short term or long-term loans and offered against any property, like the owner’s property or business assets by various banks like Axis, SBI, ICICI, Canara Bank and others.

Let me put this with an example, if a company requires a loan of 11 Crores, it can raise the capital by selling the Bonds or the Shares to the investors and carry out the daily business of the company. 

  • Equity Finance: This is another form of business finance, where you will be investing your money, funds from other shareholders to run the business.  The best part is it is not complicated like a loan and need not be paid back immediately. You will create more cash on hand and pressure of repaying the loan does not take place and will also interact with various investors, adding credibility and additional skill sets to your business enterprises. This can also be termed as the “Easy Finance”. The equity finance is gaining lot of importance and momentum as you will get the money from any sources like
  • Crowd Funding: It is a process where you raise the capital using contacts with a large pool of persons, contacting them personally, using social media and other platforms. It encourages investors to give a large amount in exchange for a product that you promote, as investors will have some utility about the product.
  • Government Assistance: Let us look at a simple example. Pavan, a retired supermarket employee, working in Big Bazaar establishes a small supermarket in India known as “Markz” and will request government for assistance. The government will give assistance, for supermarkets in the form of low-cost advisory services, technical support, information and guidance. Pavan may be eligible for grants in circumstances like purchasing products, doing the marketing research, logistics, procurements, undertaking survey, developmental assistance and business expansion plans, buying basic and higher end equipment, for expanding “Markz” supermarkets.  Most of the banks are also offering financial assistance to people like Pavan believing in setting up start-ups, as a part of the Atmanirbhar Bharat initiative of the Government of India.
  • Private Investors: To be honest, they can be termed as “Business Angels”, who are wealthy and looking at the situation of the business owner, will give large sums of money, at reasonable rates, in return for favours. Their role will be like Share in Profits, Services, Position in Management of Enterprise and others. Interestingly, they breathe the updates of the financial world day in and day out, so they can also offer valuable advice to the management of the business establishment in getting rid of liabilities and ways to clear loan as well.

Significance Of Business Finance

Business will need to understand and analyse their financial activities for various reasons, like surviving in bad times and recovering well to do good in the future. How you manage the resources, will decide on your ability to Purchase Goods, Obtain the Licenses, Employing the Staff, Increased quality and productivity, Welfare of the employees and Expand the Resources in a logical manner. It is essential to have great vision and a great product for the company, however the notion of Business Finance and its impact cannot be ignored.

The business finance is good in making things happen like:

  • It is vital to have starting capital or a small business loan to turn the business dreams into reality.
  • This gives the entrepreneur an absolute control over the company and keep the person abreast with the consequences.
  • This helps to avoid the debt ratios as the person can have more money in hand.
  • Helps in having an effective business cycles like Smart Investments, Great Credits, Cash Savings, and effective supply of the financial resources to make the business rise.
  • This helps in having an effective payroll management for the employees to boost their work culture and increase productivity.

Remember, when you spend money, it can either be an expense or turns into assets. You must have sufficient money for any challenges so that the business enterprise creates jobs and generate the profits.

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