5 Essential Sources of Business Financing
What is Business Finance?
Business finance refers to the money and credit employed in the business. It includes attaining and utilizing the funds in such a way that the business firms are able to carry out their operational tasks effectively and efficiently.
Following are some of the features of business finance that will make its meaning clearer:
- All types of funds used in the business are included in business finance
- Business finance is required in all types of organizations- large or small, manufacturing or trading
- The amount of business finance differs from one business organization to another as the amount depends upon the nature and size of the business.
- Business finance involves approximation of funds.
Need and Importance of Business Finance
Business finance is needed for the establishment and development of every business organization. As the business activities grow, the financial need of the business also grows. Funds are required by the businesses for the purchase of land and building, machinery and other fixed assets. Apart from these activities, money is also required to carry out day to day expenses of the firm that include; purchase of raw material, payment of salaries, electricity and telephone bills etc. Money is the asset that bridges the time gap between deals and production.
One of the biggest issue that is faced by the businesses, whether at the start or at a well-established phase, is having sufficient levels of funds. Thus, every business must be aware of the different source of business financing. Some of the business financing sources as follows:
- Personal Savings/ Love Money
Personal Savings is one way that can be used to finance a business that is just starting up. One of the most obvious advantages of using personal savings to establish or expand a business is that you abandon no control over the business. However, it is rare for a business owner to have enough personal savings to complete the finance of the business.
Love Money is a sort of gift or a loan from the family and friends, that can be another source of business finance, especially during the initial stage. This helps you to maintain control over the business. Also, make sure that keeping aside personal relationships, the amount has to be repaid at all terms.
- Conventional Debt Financing
Some of the common sources of financing used by business owners are banks, credit unions, and other financial institutions. Lines of credit or operating loans, term loans, mortgages, and credit brands are common financing instruments used with debt financing.
There are many financial institutions that need a well-defined business plan before granting them any sort of loan. These business plans commonly include of the financial statements of the business, personal net worth statement, management capability etc. and a resume of the owner of the company.
The business plan of your firm will be studied and analyzed very carefully in order to determine the level of risk present. The evaluation of the risk of the business will ultimately regulate if the financial institution is ready to lend money to your firm, how will the amount be repaid and security etc. The major attention of lenders will be in the following areas: cash flow and profitability, management capability, levels of working capital, levels of debt to equity, and ratios in your business firm.
- Government Assistance
There are various forms of government assistance available for the business owners in the form of grants or loans from the federal, provincial and multiple levels of government. Such grants and loans are targeted at particular industries or areas and have the criteria that must be encountered by the business to make it eligible for financing.
The government grants and loans can result out to be a very valuable source of financing for business owners. Conversely, the business owners must be able to invest a significant amount of time in order to complete the process of application. There are chances that the approval is slow due to wide assessment procedures.
- Venture Capital
Another alternative form of financing which may be sought at times when the firm is not able to attract appropriate financing from other conventional sources is venture capital. Venture capital is basically a source of equity financing that is sought by businesses of medium size.
Angels or informal venture capitalists are generally the individuals with significant capital to invest in the business that has strong growth potential.
- Going Public
For the companies that have developed to a proper size, “going public”, i.e., selling the shares of your business to the public and then listing them on a stock exchange, may be an option. “Going Public” can give the business, the assess to huge pools of capital and considerably escalate the value of the shares of the business owners which they retain. Still, there are certain important costs and other disadvantages that must be considered carefully before making a decision to “go public”.
These may include: restricting the management’s freedom to act, the significant time and expense linked with “going public” and fulfilling the needs of the security legislation, loss of privacy, limitations on the sale of the business owners’ shares and loss of control.