Whether small or large, every business needs money to start, which is called the initial capital. Further, to ensure seamless operations, cash flow is imperative at every level. With various sources of business finance, business persons can manage multiple expenses and maintain cash flow.
Business Finance is an umbrella term that includes various segments that are different in nature and dedicated to various enterprises as per their requirement. Read on to know 5 essential facts about business finance and its importance in respect to business.
Types of business finance
Businesspersons willing to avail of business finance must know that there are primarily two types of funding options available in the financial market. These include,
- Equity finance: Equity finance is one variant of business finance where an investor invests a lump sum amount in a business and receives ownership in exchange for the money they contributed. Once the business gains traction and generates profit, that amount (of gain) goes into the investor’s account as per their number of shares tied with the business.
- Debt finance: One of the popular modes of financing, debt financing, refers to the money borrowed from a lender which needs to be repaid after a certain period of time along with pre-set interest rate.
Volume of business finance
Another essential fact about business finance is its volume. The volume depends on the nature and size of an enterprise. It means that for large-cap companies and small-cap companies, i.e., businesses, the required funding also changes. Here, business persons need to identify their needs and opt for funding accordingly.
For instance, a small factory or workshop involving repairing electrical items requires a smaller investment than those focusing on large-scale manufacturing and trading activities. In such cases, the latter needs more capital than a small factory owner. Various sources of business finance available in the financial market help business choose an ideal one as per their requirement to continue operation.
Amount of business finance
The size of a business determines the amount of capital required. However the amount also depends on the needs of the concerned business. Which leads to the segregation of business finance as per period. These include,
- Long-term finance: A particular business requirement often runs for a long period (more than five years), which demands funds to be invested for a long tenor.
- For instance, upgrading business or utilising new business opportunities can be one of the reasons to get machinery loan for your business (a type of business loan).
- Mid-term finance: Businesses willing to upgrade technology, introduce a new product, or beat rising competition need mid-term finance (taken for less than five years).
- Short-term finance: Short-term finance (taken for less than one year), also known as working capital, is availed to meet day-to-day operations, such as purchasing raw materials, giving salaries, hiring staff, etc.
The amount of business loan acquired by an enterprise depends on the season as business profit. That can escalate in peak season and go downwards in dull season.
Sources of business finance
The financial market comprises numerous sources of business finance. These include,
- Business loan: One of the popular ways to finance one’s business is through business loans. Businesses with 3 years of vintage and applicants with a credit score of 685 or above can avail business finances at best terms. Leading NBFCs like Bajaj Finserv provide high-value unsecured business loans against simple eligibility and minimal documentation.
These NBFCs extend pre-approved offers to simplify the loan availing experience. These offers are available on other financial products, such as personal loans, credit cards etc. Individuals can check their pre-approved offers by entering their names and contact details.
Also, several business loans for women are available in the financial market that encourages female entrepreneurship.
- Invoice financing: Invoice financing enables businesspersons to borrow money against unpaid invoices of their customers. This type of finance option helps individuals to tide over short-term liquidity crunch.
- Angel investors and Venture capitalists: Start-up companies and small businesses struggling to get a traditional business loan can resort to these popular alternate financing options. Whereas angel investors fund early-stage businesses, venture capitalists pick more developed companies and focus on their strategic growth.
Apart from these, there are crowdfunding, inventory financing, business cash advances, and many others.
Nature of Business Finance
Nature and features of business finance depend on the particular funding option chosen.
- Secured/unsecured: A business loan can be secured or unsecured. In case of secured loans, business persons have to pledge collaterals. Such as houses, cars, or shares, to get the required funds. However, in the case of unsecured business loans, borrowers can avail themselves without pledging any assets; hence, it is a popular financing option among borrowers lacking collateral.
- Flexi loan facility: Several NBFCs offers Flexi business loan facility where one can withdraw as per their requirement and repay as per business cash flow accordingly.
- Faster processing: Business loans are offered against flexible eligibility and minimal documentation, which results in faster disbursement of the loan amount.
- Flexible repayment: Business financing can be short-medium-long term. Hence, borrowers can repay as per their suitability.
Equipped with the knowledge of five essential facts of business loan. Individuals can now give the necessary boost to their businesses. Further, the discussion on various sources of business finance can help individuals to choose an ideal financing option.