The Hustler's Digest StaffBehind every successful man is a woman, and behind every successful business is a strong financial strategy. Find out what it takes to build a good financial backing and what it means to have finance in business. Learn about finance in accounting and budgeting for your business no matter how big or small it is.
Businesses all around the world run on money. Money can come from different sources and gathering those sources together to fund a business venture is called financing a business. There are many ways a business can be financed, it depends on the size and type of the business. Some businesses require a lot of financing to start and some businesses don’t. It is not at all important to have all the funds in hand before you start your business, there are ways you can borrow money for your business and if you don’t want to increase debt then you can partner up and find your business stable financing.
Why do businesses need finance?
To get something one must lose something first. Similarly to do business one needs money and a lot of help from trusted sources. Starting a business might seem daunting to many people because of the financial part of the plan. Many people aren’t very well versed in the financial lingo companies use today. It can be very confusing for the common man to set up and run his business. Even a CEO of a large company might need help from financial advisors from time to time.
Regardless, finance is a very important part of the business as it helps the business make deals, plan growth, pay expenses and build awareness for the business. Moreover, businesses would not be able to trade without a good financial back up plan. Many times a business might make a mistake, but with proper financial backing it can get back up on its feet.
Since the financial lingo is hard to grasp and finance being a very important part of the business system it is important for a business man to at least learn common parts of why businesses need financing and from where businessmen get the money. What type of financing will be beneficial for them and which ones will drown them in debt?
For these questions there are professionals who can answer and deal with all the problems a business man would have, but knowing some tips and tricks of financing might go a long way.
Importance of finance in a business
Finance is money to a business. Just like a normal person needs money for his/her daily life and business too needs money or funding for its daily endeavors. Most businesses have a petty cash system which handles the day to day expenses of the business whereas some businesses completely rely on money managers for simple tasks. Regardless, managing and acquiring funds for their business is something only a businessman can decide on.
Funding can also prove beneficial when a company wants to expand or grow. Several times having proper finances will save you spending money on trades with your suppliers or vendors.
Advantages of getting financing
- Financing will make it easier for you to expand and grow your existing business
- Help to open up new business or new ventures which can help your existing business plan
- Start up new business without spending the majority of your personal funds
- Getting debt or equity financing will lessen your corporate tax.
- After getting financing for your business you can pay back in small instalments rather than using up large amounts of your personal fund to start or grow the business.
- Getting financing through the proper channel will get you insurance for your property or asset on which you’ve taken financing for.
Disadvantages of getting financing
- Not being able to fully own your business or assets
- Decision making power is shared among the people and companies who have financed your business, you might find yourself losing control of your business.
- The risk of an unsuccessful venture, and then having to pay the money back without stable income will put you under a lot of debt.
- Growing too quickly can be harmful to your business.
- Increased expense of returning the principal amount along with increasing interest rates.
Types of finances for businesses
Nowadays there are many choices for people who want to start their business but have no funds to do so. Many finance companies have developed many products to cater to businesses looking for funding. There are many products which even cater to individuals who wish to open up their start ups in order to step into the business community.
Several business leaders look for individuals on programs like “SharkTank” to invest in young and raw talent. There are many examples like these in the market but the few mainstream types of finances available to the business owner are as follows.
Debt finance
Debt finance is when a business decides to take out a loan or a mortgage against a collateral or against one of its business assets. In simple terms it is a loan taken from a lender which has to be paid back to the lender with interest.
Traditional loans
These are the loans which are either given out by the banks or any financial institutions. There are evident risks for the lender by giving out funds like these so the traditional lender usually opt for well established business and rarely do they ever meddle in the middle tier business.
While availing these traditional loans there are several charges which come along with them. They charge you interest on your principal amount and then some other management fees to go along with it. The repayment of these loans can be as long as 20 years and as short as 3 years.
Business mortgage
Similarly like the traditional loans the bank or the financial institutions have made different funding products for different types of customers. If you do not wish to take out a loan in the name of your business you can just take out a loan in the name of an expansion or an asset which you wish to buy.
This is a safer option for both lender and borrower because the asset would then be a collateral for the loan and the borrower wouldn’t have to risk his/her whole business if the loan defaults.
Credit lines
Credit lines or trade credits can be set with your vendor or retailer for your goods and services. Different companies have different policies for the trade credit but with good relations and good will there are many options one business can give to another businessman.
Pros and cons
Like all financial products, here are pros and cons of debt financing if you choose to avail it.
Pros
- It is the fastest way to ensure financial aid or funds for your business venture. This is important because in rapid decision making, the fact that the fund can be arranged quickly is vital for any business decision.
- You can save up on Tax because the loan you acquire from a bank or financial institution has interest on it. Businesses can deduct the interest paid to the bank from their taxes.
- The control and decision making power for the business stays in the hands of the owner. Other ways would mean giving up control in order to get funding but while borrowing from a bank or an institution the owner doesn’t have to give up the controls of the business.
- The time of repayment is of your choice. The business owner can decide on the time period of the loan and how he intends to pay over time. Whether the loan is short term or long term it is the business owners choice as to what suits him/her the best.
Cons
- There are fixed payments to be made during the time period and nothing less or more would do. Whether the business is making profit or not the repayment of the loan stays constant and has to be made. Any default in the payment would result in penalty charges and more interest rates.
- Regardless of the fact that your business has taken flight or not, the repayment plan starts instantly.
- Collateral must be given in exchange for the loan, and any collateral given to the bank or the financial institution, can be taken away if the business fails to repay the loan.
- Paying back the loan every month will result in constant cash flow outflow of the business.
Equity finance
This when the business owner sells his equity for funding. This also means that the business takes on shareholders or sells their stocks on the market. This is a great way to collect funds for your business because this way the business does not end up in debt and gains different experts in a stride.
Equity financing also includes getting business partners and merging with other businesses in order to expand and grow. Businesses prefer merging when they’re intrest line up and they integrate their assets to work together, this doubles the size of the business.
Partnering up
Getting partners for the business is the oldest and the most common way of getting the funding without involving financial institutions. This method includes partnering up with other businessmen to get their money in exchange for the company’s shares or merging with other businesses to merge resources and go ahead with either horizontal integration or vertical integration.
Crowdfunding
Crowdfunding includes the opportunity of selling off your company shares to the stock market or collecting funds from the community around you. This is also a very easy way to collect funds but it requires a lot of time to do and a lot of effort on the part of the business.
Investors
Investors are people who are willing to give you money or fund your venture in order for you to expand or finance a part of your business. There are many venture capital companies who facilitate the interaction of these investors to businesses and individuals looking to finance their endeavor.
For example, there is a whole TV show of major businessmen and women trying to find small businesses to invest in exchange for the equity in small businesses. The show “Shark Tank ” is that show and is very successful in reshaping and helping small businesses all over the world with their expert advice.
Pros and cons
Like all financial products, here are pros and cons of equity financing if you choose to avail it.
Pros
- It is a better option than debt financing for small businesses as the loan repayment isn’t immediate and can be paid anywhere and anytime in the long term future.
- Since the payment isn’t meant to be paid immediately there is not a lot of cash outflow from the business and that money can be used for the business to grow and expand as the owners see fit.
- Depending on who the investor is they can bring expertise and credibility to the business and along with it a lot of good will and opportunities for further growth and expansion.
Cons
- There is a loss of ownership as you sell the rights of your business in order to secure the financing for it. The investor would be included in the board of directors and will have a vote on the decision making team.
- The decision-making power being in their hands gives them the authority over the direction of the business and even day-to-day problem solving.
- This type of funding is not instant. It requires careful screening of potential investors and people who you want your business to be affiliated with. This process would take a lot of time and effort to come up with financing.
Sources of finances for businesses
Having proper sources for financing your business is essential and very important. Getting funding from a shady source can be damaging to both the business and the owner. Not having a proper source of financing can also land the business owner in tons of legal issues and litigations. Here are some reliable sources of finance which can help businessmen get the money they require.
Financial institutions
Institutions like banks and other lending agencies who work with financial resources are a great way to get immediate financing for your business. Although because of the 2009-2010 financial crises many financial institutions have stopped giving small businesses the loans they require. They in turn prefer to give out loans to established businesses with steady cash inflow.
Most banks also require a lot of paperwork by the business wanting to get finances approved for any business objective. They also expect the borrower to keep a collateral which can be seized by the institution in the event of non payment of the loan.
Non-Financial companies
Some companies start up with financing or contributions from friends and family. These arrangements come with very few strings attached and are very important for small startups to step into the real life business world.
These kinds of loans come with minimal paperwork, less stress of repayments and immediate cash inflow. Although these funds are very easy to secure, they do carry a lot of reputational risk if you aren’t able to pay them back properly.
Venture capital
This form of financing is very important as it helps people commercialize their innovative ideas. To develop a business the first step is to get an idea and start working on it. When the idea is developed enough for the market then a business would need money in order to commercialize it.
This is where venture capital companies come and invest in the idea of people to commercialize and fill the market void. It all starts with a huge first investment to kick start the business and then smaller investment to keep the business going. Venture capital companies hold a considerable part of the business in their grasp.
Angel investors
Investors usually demand a share in the company and dont demand the decision making power to control the company. Angel investors only give the capital to the business owners and leave them be, they are however eligible for the dividend return and some of the profit which is earned by their investment.
These people or businesses look for individuals to invest in, they’re more interested in what a person can give back to them with their goodwill and reputation rather than in chunks of money.
Government subsidies
Government help is given to businesses which show immense success and potential for the future. These are given out for not just businesses but the whole industries to flourish and help grow the economy as a whole. These funds are also directly given out for public welfare and environmental betterment.
Business finance for start ups
Most of the traditional financial firms wont give out loans to small businesses because of their unstable nature and less cash inflow per month. Since the financial crisis of 2009-2010 many financial companies have stopped trusting small businesses and created alot of red-tape for such businesses to acquire funding.
No matter that, there are still many options for small businesses or startups to get their funding from. Startups typically have a hard time getting financial help because of the fact that they are not a business but an idea. Investing in an entrepreneur is very risky, so no traditional financial institution will lender them the money. Businesses like these tend to either collect finances from their friends and family or get the attention of a venture capitalist.
Business finance for running companies
While running companies have no hard time looking for funding for their business, there is the issue of how quickly they want the money and what are the objectives of the company.
Time is an issue when considering getting funding from investors or trying to sell shares of your company in the stock market. Both these methods take a long time because the business owner must make sure that the investor has the best interests of the business at heart. Even selling shares in the stock market will not bring in the fund quickly as it takes time to sell the shares and get the funding into the business.
For a quick and fast process the more traditional method of borrowing money would be better since it won’t include giving up the controls of the company. With large businesses it is very easy to lose control of the business to shareholders and it becomes hard to direct the company to where the owner wants it to go.
What is best for my business?
At the end of the day the best thing for a business to do while looking for financial products is to study what all products are available in the market. Making an educated decision and to get the best financial products is essential to complete your business goals and ambitions. Moreover, to succeed and grow in the business world a businessman or woman must know all about the financial world and be very financially savvy.
Conclusion
Business finance is just a subject to learn for some people, but the people who have the talent and mindset of an entrepreneur will know that business finance is the driving force behind all the business ventures in the world. It is what drives the economies to develop and grow. All in all, business finance is the backbone of the business world.
