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Business Finance: Meaning, Sources, and Types 

July 21, 2022 • 3796 views
Author: PoonawallaFincorp Category: Business Loan

If you’re a business owner or looking to become one, you may already know the importance of Business Finance. You need capital to start and run a business, and Business Finance allows you to generate that capital. 

Entrepreneurs need to spend most of their energy and time on securing Business Finance, compared to any other business operation. This shows how central Business Finance can be to an enterprise. The business that thrives is not simply the one that has the best product or the best service, but rather the business which has the highest amount of capital. 
In this article, we’ll cover everything you need to know about the basics of Business Finance including its meaning, the sources of Business Finance, and the types of MSME Finance, and other types of business finance instruments. To know in detail about small business lending, go through the contents of this page properly.   

Business Finance - Meaning & Definition

Business Finance refers to the funds that a business requires to establish itself, pay for all business activities, and to expand itself.  
Business Finance is needed to rent office space, pay all the employees of the business, pay for any raw material required, and to pay for machinery or long-term assets required to make its products. Further, Business Finance can also be required for intangible assets of a business such as patents, trademarks, and copyright.  
Any activity that needs to be done to secure the money needed to run a business comes under the purview of Business Finance.  

What are the Types of Business Finance?  

There are two primary types of Business Finance.  

Equity Financing 

Equity financing refers to financing that is generated by selling ownership or stake in a company. Equity financing can be raised by selling ordinary shares or preference shares of a company. This type of financing allows a company to raise funds without going into debt. The incentive for investors to purchase the equity of a company is that the growth of the company can increase the value of such shares, regardless of whether they are ordinary shares or preference shares.  
If it is a private company, then the equity financing can only be raised through private means. A founder cannot approach the public to raise such money. However, once a company meets certain requirements it can become a publicly traded company and raise money from the general public.   

Debt Financing 

This refers to money that is raised by borrowing. Debt financing allows companies to raise funds without the sale of ownership or control of the company. Debt financing can also be relatively easy to obtain when compared to equity financing.  
Debt financing can be availed of by approaching banks or other types of financial institutions. There are a lot of ways credit can be availed including through Business Loans, Working Capital Loans, and the sale of debentures in the form of small business financing. 

Why do you need Small Business Financing?   

The importance of business or MSME Finance speaks for itself.  

  • Business Finance allows founders and entrepreneurs to acquire capital assets, pay for talent, and to acquire office space, along with anything else that a business needs to get off the ground.  
  • Once such financing is secured, a business owner can focus on running their business and taking care of the day-to-day needs and the long-term of the business. It allows business owners to stop worrying about funding and start working towards their goals.  
  • It can help a business be prepared for unforeseen contingencies. If a business suddenly meets high demand, it can hire enough workers to be able to meet such demand if they have adequate finances.  
  • There are many ways in which such financing can be secured.  

Also Read: Top 10 Subsidies Provided By Government For Small Businesses And MSMEs

Sources of Business Finance  

The sources of Business Finance can be classified in three primary ways. This will help entrepreneurs gain a complete understanding of how to finance a business in India.  

Based on Time

  • Long-term Financing – This refers to financing for a business that is available for more than five years. For example, selling shares of a company allows a company to generate funding for the long term. A business can also avail of a long-term business loan to secure funding for more than five years.  
  • Medium-term Financing – This refers to funding that has a period of more than one year but less than five years. Examples of such financing include taking public deposits, issuing commercial paper, medium-term loans from a bank or financial institution, or lease financing.  
  • Short-term Financing – Short-term financing can be used to meet the needs of a business for less than one year. For example, availing of a working capital loan allows a business to meet its current liabilities. Other examples include an overdraft facility or a line of credit or credit cards.  

Based on Generation 

  • Internally Generated Funds – This refers to the funds that have been generated from within the company itself. This includes any profit that the business may have seen through its operation, retained earnings that can be used to fund future operations, and any money raised through the sale of business assets.  
  • Externally Generated Funds – These are funds that have been sourced from outside the company. It includes any debt which was availed from a bank or financial institution, any debentures which were issued, or any shares of the company that were sold through private or public placement.  

Based on Ownership 

  • Founder’s Funds – This refers to capital that the founder or founders bring to the table. This financing allows founders to retain ownership and control of a company and to benefit from its long-term growth. For example, if a business owner funds Rs. 10,00,000 into their business, then that forms a part of the founder’s funds.   
  • Borrowed Funds – This refers to capital that the business needs to repay after a certain period. These funds may be borrowed from the public through debentures or from financial institutions through different types of credit. This is another type of small business lending.  

Wrapping Up

Business Finance is the heart of any business. However, at times, it can be hard to find financing for a business. If you’re looking for MSME finance, then consider taking out a collateral-free Business Loan or a Working Capital Loan. You can avail of such loans entirely online through a hassle-free process and even take advantage of flexible repayment tenures.

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