Every business, regardless of type, relies on working capital.
Finance plays a crucial role in fostering the growth and expansion of
a business. For efficient operations, you need adequate finances.
Today, there are numerous ways in which businesses, irrespective of
size and age, can arrange for the necessary funds. This guide will
cover the different sources of business finance and its importance.
Read on to know more!
What is Business Finance?
As aforementioned, finance is the core of every business, and
business owners must look for financing options to operate the
business constantly. The funds which are availed by the business owner
to operate the business are known as business finance.
These
funds can be used for various purposes, such as day-to-day business
operations, purchasing raw materials or goods, buying fixed assets, etc.
Also Read: Business Finance: Meaning, Sources, and Types
10 Importance of Business Finance
The following list highlights 10 importance of business finances:
1. Formation of Business Entities
Starting any business from scratch requires financial resources for registering the company, obtaining licences, and establishing the necessary infrastructure, equipment, technology, and employee wages.
2. Driving Sales Efficiency
Business finance is crucial for conducting sales efficiently, enabling the acquisition of resources, and product delivery. Adequate finances help the transformation of raw materials into finished goods. Also, companies can hire a salesman to boost sales.
3. Business Solutions and Growth
Modern business expansion relies on financial support for purchasing goods, technology, and equipment and developing facilities, laboratories, and other essential elements.
4. Financial Stability
A firm's financial position determines its condition, facilitating easier vendor payments, employee compensation, and timely repayment to creditors. These factors serve as the foundation for evaluating a company's health.
5. Competitive Edge
To compete effectively, businesses need funds for reputation-building, advertising, introducing new products, providing customer incentives, and offering products and services at competitive prices.
6. Infrastructure Development
Funding is essential for creating infrastructure such as location, land, business sites, and necessary installations, varying in amount based on the business scope.
7. Business Transformation
Finances are required to renovate and manage the business, adopt new methods, acquire modern equipment, introduce new products, and embrace digitalisation.
8. Advertising and Promotion
In today's expansive marketing landscape, finances play a crucial role in various advertising and promotional activities, including media exposure, sales promotion, transportation, storage, and marketing research.
9. Employee Welfare
Ensuring the well-being of employees involves financial support for services like housing, healthcare, education, transportation, and pension schemes, among others.
10. Supporting Innovation and Global Trade
Business finance is indispensable for innovation, engaging in global trade, and achieving diverse industrial and corporate development strategies.
Types of Business Finance
In India, there are two primary business financing options:
- Equity Finance
External investors invest funds in your company in exchange for shares. They may not be involved in daily operations but have a say in important company-related decisions. Profits are shared based on the percentage of shares held.
- Debt Finance
Borrowing funds from lenders and repaying them on scheduled dates ensures seamless fund supply. With debt financing, business ownership remains with you. Lenders provide funds for growth, charge interest, and allow you to manage the business independently.
Different Sources of Business Finance
Here are the different sources of business finance:
1. Inventory Financing
Inventory is generally used by companies who are looking for urgent funds. Inventory financing is a short-term financing option where a company keeps its inventory as collateral to get funds from the lender. There are two types of inventory financing options available for the business: inventory loan and inventory line of credit. Inventory financing is popular amongst micro, small and medium size companies.
2. Invoice financing
Businesses use invoice financing to borrow the money against the amounts due from the customers. This is a short-term financing option that helps in improving the cash flow of the business, paying any short-term expenses, paying employee salaries and suppliers.
3. Financial Institutions
It is one of the traditional types of financing options where the companies go to the financial institution, which includes banks and NBFCs, to opt for a loan. These financial institutions have certain criteria for different types of Business Loans.
4. Venture Capitalists
Venture capitalists or angel investors provide short-term finances through equity funding. In this arrangement, the entrepreneur gives a share of the company to investors in exchange for agreed-upon funds. After providing the funds, the investors become company owners, holding the shares offered by the entrepreneur.
Role of Business Finance in Decision-Making
The role of finance is twofold. It oversees expenses, pays bills, and adheres to budgets. Simultaneously, it plays a pivotal role in helping businesses generate profit. The finance department sets financial goals, monitors progress, and guides other departments in establishing their goals and budgets.
Financial figures influence decisions related to employee hiring, raises, bonuses, employee benefits, and product sales. Finance is an important point to consider during the strategic management of the business and important decision-making.
How to Apply for a Business Loan with Poonawalla Fincorp?
You can apply for a Business Loan with Poonawalla Fincorp by following the below steps:
- Step 1: Click on the ‘Apply Now’ button available on your screen.
- Step 2: Complete the application form by providing details like your full name, PAN card, monthly income, etc.
- Step 3: Finally, upload the necessary documents and select the ‘Submit’ button to complete the process.
Also Read: Why Managing Working Capital is Important for Future Funding?
To Conclude
As a business owner, you might need business finances at some point to expand your existing business. Therefore, you can use the above-mentioned different sources of finance to meet your specific monetary needs.
Trusted lenders like Poonawalla Fincorp provide customized and comprehensive Business Loan at affordable interest rates. Apply now and see your business reach new heights of success!
Frequently Asked Questions
- Is there a repayment obligation in equity financing?
No, equity financing does not involve repayment obligations. Unlike debt financing, businesses do not need to repay the invested capital, offering more flexibility in managing cash flow.
- What are the different internal sources of finance examples?
Some examples of internal sources of finance include -
- Retained profits
- Discount selling
- Capital of the owner
- Selling of fixed assets
- What are the examples of external sources of finance?
Families and friends, share issues, and angel investors are external sources of business finances.
- What are the factors that affect the business finances?
The nature and size of the business, production method, and business cycles are the factors that affect the business finances.