4 Methods of Financing a Business Organization
What is financing?
Finance is that field that is related to the investment of assets and liabilities over a particular period of time, under the conditions of risk and uncertainty. Finance may also be defined as an art of money management.
Basically, there are two main types of financing that the companies can avail: Debt and Equity. Debt is a kind of loan that has to be repaid with the fixed interest rate within a specified time period. But, this method is typically considered inexpensive as compared to raising capital due to tax deduction considerations. Whereas, equity doesn’t need to be paid back,
Need for Financing
Financing basically refers to the process of providing funds to the business to carry out necessary activities. This process allows the businesses to take advantage of upcoming opportunities to grow in the market. Financial tools such as loans and investments are somehow responsible for the success of the business.
Importance of Finance in Business
- Helps in accomplishing goals and objectives
- Working on the short-term activities
- Handling the long-term activities
- Achieving Financial Goals
Methods of Financing a Business
It is not easy to start a business as it is an exhilarating attempt. With the help of financing, you can start up a new business and further ramp it into profitability. Every business has its own financial needs depending upon the type and size of the business. Financial activity helps in stimulating the economic growth and keeping the companies wealthy.
Not all businesses start with an adequate amount of funding. Thus, there is a need to explore various methods of financing.
- Venture Capitalists
One method to fund your business endeavor is to find a venture capitalist. Venture capitalists want to capitalize on high-growth companies and show accurate signs of a high return on investment. One advantage of this financing method is that venture capitalists are not afraid to take risks, whereas financial institutions like to lend money to the safer undertakings.
- Financial Institutions
Another option that the business owners have is taking a loan from a financial institution. Banks, credit unions, are the financial institutions that offer lines of credit to the businesses that are at the initial stage of establishment or require financial assistance for any kind of improvements or developments. A proper application process needs to be followed to qualify for a loan. There are many financial bodies that require the businesses to provide plans for the way money will be used and the need for funding.
- Home Equity Line of Credit
Taking a home equity line of credit on your home is another way to finance your business venture. This is a type of loan in which the lender agrees to provide a maximum sum within a decided time period. The interest rate on home equity lines of credit is comparatively less than that charged on the commercial bank loan.
- Private Investors or Friendly Loans
If your family or close friends are strong enough to spend money, you can either ask them for a friendly loan or ask them to invest in your business. There are chances that they get interested in your business and plan to invest in it, further expecting a worthy profit. This option is more anticipated than the commercial bank's loans as they charge high interest rates.