Business Finance: Definition, Types, Opportunity & Advantages

Besides strengthening the establishment of a business, a company’s reserves play a vital role in helping it grow. Finances are available from a wide range of sources and of many types. To better understand business financing, let's examine its core meaning, type, and opportunities.

What Is Business Finance?

Business finance refers to the funding necessary to start and expand businesses. It's an umbrella term for the financial opportunities and costs that business owners face to purchase capital, deal with cash fluctuations, meet demand-supply issues, and invest in the necessary equipment and machinery at the beginning of their businesses. Liquid funds are essential to the successful operation of any organization. Hence, every expenditure, from the most modest to the most significant, requires financing.

Importance of Business Finance

In this section, we look at how business finance proves useful to business owners.

Acquiring Assets:

The most important purpose business finance serves is enabling a business owner to acquire or purchase an asset. For a business, the assets could be equipment, furniture, machinery, and real estate. A business needs different and sophisticated tangible and intangible assets to grow and stay relevant in the industry.

Supporting Expansion:

A business needs business finance to expand existing products or service offerings, introduce new products, venture into new markets, or conduct marketing and promotional campaigns. All this requires substantial investments and business finance can provide this.

Financial Planning:

Financial planning is required in every aspect of business. It is particularly important for MSMEs to identify the areas to spend on, cut costs, and determine how and where to source and repay funds.

Meeting Daily Expenses:

Business finance also helps meet daily business operations such as, buying raw materials, paying taxes, rents, salaries and bills. All these can be met with adequate business financing.

Adapting Technology in Business:

A business needs finance to add and adapt to newer technologies. By investing in new technologies, business finance helps a business increase RoI while also reducing manual errors.

Recruiting Talent:

As much as technology is important to a business, human resources are indispensable to a business too. Business finance can take care of hiring the right employees.

Navigating Contingencies:

Business finance can also help an owner tide over challenging business conditions such as shortage of funds, occupational accidents, labor strikes, and other economic conditions. With the solid backing of business finance, a business owner can also take calculated risks without hampering operations. A business owner can try new aspects of his business, newer technology and more business-related activities to help it grow.

Types Of Business Finance

There are two types of business finance options: debt finance and equity finance.

Debt Finance

A debt finance transaction involves borrowing money and paying it back with interest. Due to the repayment structure, business owners prefer this business loan model. Along with being tax-deductible, interest rates on credit financing are often lower than equity financing, allowing you to plan your payments according to your financial projections.

Types Of Debt Finance

• Bank Loans:

A bank loan can help you make large or small lump sum payments for important purchases or expansion projects. The business loan application process involves strict lending criteria, including collateral and a thorough business plan detailing the usage of the loan amount.

• Business Credit Cards:

Credit cards are readily available and easy to manage compared to bank loans. While high-interest rates and fees are their main drawbacks, they are a good alternative for small purchases.

• Invoice Finance:

Invoice financing enables you to secure financing by utilizing outstanding customer invoices. By doing this, you avoid the long wait for payments and can use the invoices as a cash advance for up to 95% of the invoice value.

Equity Finance

The exchange of acquiring funds for a stake or part ownership in the business is known as equity finance. This financing type helps you avoid the problems that debt financing can cause with your cash flow. You also don't have to worry about your credit history for equity financing. However, not everyone is interested in giving up a stake in the company. New investment partners may also want to participate in business operations and control. Approach business financing differently if you think these aspects will cause issues for your business.

Types of Equity Finance

• Venture Capitalist:

As venture capitalists devote their time to your business's success, high-growth potential companies with scalability often take this path. VCs tend to invest large amounts expecting large returns. Therefore, audits are common preventive measures.

• Crowdfunding:

Crowdfunding has become popular over the past few years. The effectiveness of crowdfunding depends heavily on the success of the promotional campaign. They do not require any auditing or vetting of the company. The trade-off is that you may not be able to raise the number of funds you want.

• Angel Investors:

They are similar to venture capitalists but typically invest in businesses at their inception. It's hard to find angel investors because they have incredibly high net worth and take large start-up risks.

Tips for Managing Business Finance

The smooth working of a business depends on the availability of finance and its allocation to priority areas. An owner can prioritize areas of his business by efficiently managing business finance. A business owner can use the following tips to manage business finance.

Follow a Budget:

One of the most essential steps towards managing business finance is by making a budget. This helps tracking the income, expenses, and cash flow in a business. This will help a business owner make informed financial decisions.

Make Regular Updates:

Use accurate and consistent data to update all transactions. This includes bank statements, invoices, receipts and other relevant financial documents. Regular updates make it easier for a business owner to manage finances and ensure compliance with tax laws.

Plan Ahead:

A business owner must be far-sighted and must plan ahead regarding managing business finances. This requires anticipating future expenses and setting financial goals while also having a contingency plan for unexpected events.

Diligence in Managing Cash Flow:

Every business requires cash flow. As a business owner, it is essential to monitor your cash flow diligently, while ensuring there is enough cash-on-hand to cover business expenses.

Tracking Expenses:

Although a part of budgeting, tracking expenses by categorizing them in suitable heads will help know where the money is going and make necessary adjustments. You can leverage mobile apps, accounting software and other business finance management tools to help you manage your finances better and make them more efficient.

Professional Advice:

Finally, a business owner can seek professional advice from a consultant, an accountant, or a financial advisor if managing business finance becomes challenging. As experts in business finance, their insights can help a business owner restructure their finances.

What opportunities does business financing present?

Financing offers the following business opportunities:

1. Companies in all stages of the business life cycle can obtain financial assistance from banks and financial institutions. Therefore, financing can enable you to start a new business from scratch.
2. Business owners can purchase land and machinery and upgrade their software and technology easily when they have access to finance. Accessing the right tools and machinery can be the difference between future profitability and bankruptcy.
3. Entrepreneurs can invest in skillful talent and enhance their organization's technical capabilities in branding and marketing by getting the right amount of loans.
4. When you have access to finance, you can manage risks better without disrupting business operations.
5. Business financing can help you save on taxes. A business's interest payments are tax deductible from your gross income.
6. Organizations with multiple debts can consolidate their debts and repay them at a lower interest rate by taking a single business loan. A promptly repaid debt will also improve the organization's credit score. This method makes managing and repaying debts easy.

Take advantage of IIFL Finance business loans

Take advantage of a business loan from IIFL Finance, one of India's leading financial services companies, and fulfill all your financial needs. We offer a comprehensive business loan to help you grow your small business and invest in essential infrastructure, machinery, plants, operations, marketing, advertising, and more.

It's never been easier to apply for a business loan! Get your loan approved in under 30 minutes by filling out our online loan application, uploading your bank statements, and uploading your KYC documents.

Frequently Asked Questions

Q1. What are the types of business finance?
Ans. A small business's funding typically falls into one of two categories:
• Debt finance: a loan that you must repay with interest.
• Equity finance: selling shares of your company to investors in exchange for funds.

Q2. How can you fund a startup?
Ans. You can fund a startup by getting a business loan, selling your stocks, and through many other financing methods.