Sources of Business Finance

Business finance meaning

Business finance refers to the management of money and funds within a business entity. It encompasses various activities such as budgeting, forecasting, investing, and managing cash flow to ensure the financial stability and growth of the organisation. Effective business finance involves making strategic decisions regarding the allocation of resources, raising capital, and optimising financial performance. It plays a crucial role in supporting day-to-day operations, funding growth initiatives, and ultimately achieving long-term success in the competitive marketplace.

What are the different sources of business finance?

1. Financial institutions

One of the best ways to meet your business expenses is to apply for a business loan. All you have to do is meet simple eligibility criteria and submit the required documents. If your business is 3 years old and you have a credit score of 685, you can apply for a business loan from Bajaj Finserv and get up to Rs. 80 lakh to meet your business' expenses.

2. Angel investors and venture capitalists

Equity capital is another type of business financing. If you are a start-up or a new firm, you might not have adequate business vintage to qualify for a loan. In this event, you can reach out to angel investors and venture capitalists for financial aid. These investors offer funding in return for equity and profits.

3. Accounts receivable or invoice financing

You may not be able to fund business expenses like purchasing raw materials or staff's salaries if your accounts receivables are unpaid. If this is the case, you can opt for invoice financing and use unpaid invoices as collateral to get funds. Leading financial institutions offer an invoice financing loan to help businesses address a liquidity crunch.

4. Inventory financing

Inventory financing is a secured loan where a company pledges its inventory as collateral. This credit option is suitable for small businesses that don't have access to other financial solutions.

5. Business credit cards

This is one of the most convenient sources of business finance for urgent needs. It is an unsecured credit facility that doesn't require any assets to be pledged.

There are various other sources of business finance too, like peer-to-peer lending, crowdfunding, and others.

Classification of sources of funds

Period

1. Short-term sources: These funds are typically used to finance day-to-day operations and are repaid within one year. Examples include bank overdrafts, trade credit, and short-term loans.
2. Long-term sources: These funds are used for financing long-term investments and are repaid over a period exceeding one year. Examples include equity financing, debentures, and long-term bank loans.

Ownership

1. Equity financing: Ownership-based funds involve selling ownership stakes in the company in exchange for capital. This includes issuing shares to investors or venture capitalists.
2. Debt financing: Debt-based funds involve borrowing money from external sources with the obligation to repay the principal amount plus interest. Examples include bank loans, bonds, and debentures.

Generation

1. Internal sources: These funds are generated internally through the company's operations, such as retained earnings or the sale of assets.
2. External sources: These funds are obtained from external parties, such as banks, financial institutions, or investors, through equity or debt financing arrangements.

Examples of sources of funds

There are various sources from which businesses can obtain funds to finance their operations and growth. Equity financing involves selling shares of ownership in the company to investors or venture capitalists, providing capital in exchange for ownership stakes. On the other hand, debt financing entails borrowing money from banks, financial institutions, or issuing bonds, with the obligation to repay the borrowed amount along with interest. Additionally, businesses can utilize retained earnings by reinvesting profits generated by their operations back into the business. Other sources include trade credit, where goods or services are obtained on credit terms from suppliers, and grants and subsidies received from government bodies or organizations for specific projects or activities. These examples illustrate the diverse range of options available to businesses for obtaining the necessary funds to support their financial needs and objectives.

Summary

Businesses can access funds through various channels to support their financial needs and objectives. Examples include equity financing, where ownership stakes are sold to investors, debt financing involving borrowing from banks or issuing bonds, retained earnings reinvested into the business, trade credit from suppliers, and grants or subsidies from government bodies. These diverse sources provide businesses with flexibility in managing their finances and fuelling their growth.