Small businesses or MSMEs (Micro, Small and Medium Enterprises) are the economic powerhouses for every economy. They create many jobs and produce a major portion of goods and services. But, only around 39% of these businesses receive official sources of financing as per government data.
Thus, financing is a key factor here. So, whether you are a new company or looking to expand, business finance is the lifeblood that keeps your operations running smoothly. Learn How to get funding for a business in India.
So, how can business finance support your enterprise, and what does it entail? Let’s delve into it.
What is business finance?
A Business undertakes the production and distribution of goods and services to meet the demands of society. For this, finance is required. As a result, finance is regarded as the lifeblood of any firm. A business can not function unless there are enough funds available for usage.
Additionally, maintaining the momentum of a business is a significant hurdle that leaders and entrepreneurs often encounter. They must grapple with numerous operational costs on a daily basis, necessitating a steady cash flow within the business. Here, business finance plays a pivotal role.
But what is business finance?
Business finance is all about the capital or loans that a business requires for its operations or maybe to start a new business or expand the business. Apart from starting and growing their business, they may need the finance to procure assets or deal with unforeseen cash flow issues.
Business finance includes several critical components that contribute to the business’s continued success. Business finance isn’t just about securing loans; it involves strategic planning to ensure optimal use of resources.
Businesses often rely on short-term financing, such as working capital loans, to cover immediate expenses like payroll or inventory purchases. Conversely, long-term financing is used for major investments, such as purchasing machinery or real estate. Additionally, cash flow management also plays an important role. Mismanagement of it can lead to liquidity problems, ultimately hindering growth.
Thus, a well-structured financial plan can help businesses navigate these challenges efficiently. Businesses should always evaluate their funding options carefully, balancing equity and debt to ensure financial stability while minimising risks.
Also read: Managing Business Finances Effectively
Why do you need business finance?
The importance of business finance cannot be overstated, as it is essential for the survival and success of any enterprise. Some of the reasons why it is essential are:
- Business finance aids companies in acquiring fixed assets that can help them grow, such as real estate, facilities, equipment, and machinery. Through financial tools like loans and lines of credit, organisations are able to invest in long-term resources required to support their operations and expansion plans.
- Business finances aid companies in fulfilling their daily operational needs, such as raw materials, wages, lease payments, taxes, and more. Having adequate funds allows businesses to pay vendors and employees on time.
- Sufficient financing and capital provide companies with the means to embrace contemporary technologies like automation and digitisation. With adequate monetary resources, businesses can invest in the latest machinery and software solutions that streamline operations, boost productivity, and enhance competitiveness.
- To fund business growth through activities like expansion into new markets or product lines, diversification into related industries, or innovation through research and development, securing business financing can be quite beneficial.
- Ensuring adequate funding permits bringing the best qualified personnel onboard to handle crucial roles. Financial resources make it possible to attract and compensate skilled workers, managers, and other team members essential to the functioning and growth of the business.
- One of the best characteristics of business finance is that it is quite useful as it helps organisations plan for unexpected events. Maintaining adequate financial reserves allows a company to address contingencies when they arise without facing severe difficulties.
- Further, to finance business ideas, companies can take advantage of loans and funds. Need a business loan but not sure which to choose? This guide breaks down short term vs long term business loans to help you choose wisely.
Types of business finance
The sources of business finance are essentially split into two main areas: equity finance and debt finance.
Equity financing:
Equity financing provides companies an avenue to generate capital by offering ownership stakes, or equity, to investors. This can occur through one of two primary pathways. For publicly traded corporations, an Initial Public Offering (IPO) enables raising funds by listing shares on a stock exchange.
Meanwhile, privately held businesses may pursue private placements, directly selling equity stakes to accredited investors. Both options allow companies to gain funds in exchange for handing over partial ownership.
When investing in a company’s equity, individuals become partial shareholders of that business. In this role, stockholders have the potential to receive dividend payments reflecting a portion of company profits. Additionally, large shareholders may be able to influence certain decisions through the exercise of voting rights on important proposals.
Here are some specific forms of equity financing:
- Venture capital
- IPO
- Crowdfunding
- Family and friends
- Angel investment
- Internal financing
- Learn about equity crowdfunding and equity crowdfunding legislation in India in this article.
Learn about equity crowdfunding and equity crowdfunding legislation in India in this article.
Debt financing:
Debt financing allows companies to access funds by borrowing money from lenders rather than selling shares of ownership. Common lenders include banks, other financial institutions, or private individuals.
When taking out a business loan, the company commits to returning the borrowed amount and interest by a certain deadline. Some forms of debt financing for companies include business loans from banks, lines of credit from financial institutions, and corporate bonds purchased by investors.
These options provide flexibility to access capital as needed while committing to future repayment. Clarifying the specifics of debt arrangements helps businesses utilise loans responsibly to support operations and growth. Decoding the difference between debt and equity. Get insights into debt capital and equity capital. Businesses must make well-informed financing decisions because the equity and debt fund difference significantly impacts the future of a business.
Here are some specific forms of debt financing:
- Bank loans
- Asset-based financing
- Lease financing
- Trade credit
- Bonds
- Line of credit
Must read: Debt instruments in India: Understanding your investment options
Documents required
Raising funds for your company can often be challenging because of the loads of paperwork needed. Thus, preparing the necessary documents for business finance in advance can be a prudent approach.
Here is a list of documents that may be needed for a business finance application.
- Proof of income
- Proof of address
- KYC documents
- PAN card
- Business plan
- Tax returns
- Bank statements
- Detailed financial statements
- Other mandatory documents
Also read: Debt management: Advanced strategies for paying off debt quickly
Bottomline
To wrap things up, business finance is a vital aspect of any enterprise, as it enables them to acquire, maintain, and grow their assets, operations, and capabilities. As competition intensifies, the importance of effective financial management grows rapidly. This will help firms reach their goals more effectively and efficiently. Business finance can originate from various places like equity funding or debt funding contingent on the requirements and choices of the business owners.
When businesses rely on a single source of finance, it exposes them to unnecessary risk. To prevent this businesses can incorporate a smart business move wherein they can diversify their financing methods with a combination of equity, debt, and even mezzanine financing when appropriate. By channelling this strategy, companies can not only spread risks but also help in managing capital needs.
Equity funds can dilute ownership, but they also act as a financial cushion, without the pressure of repayment. Debt comes with the obligations of interest and repayment deadlines but still helps in retaining ownership.
In the end, a business should always align its financial strategy with its long-term goals. A business should always align its financial strategy with its long-term goals. Whether it’s expanding into new areas or acquiring new technologies, having the correct mix of funds is essential. This ensures that the organisation can weather economic swings, handle liabilities, and capitalise on opportunities without jeopardising its financial health.
