In business, there’s nothing more true than the saying “you need money to make money”. Business finance is a reality for any company that wants to get started and grow. It’s important that any small business owner understands business finance and the different types of finance that exist. This is necessary for performing daily business operations.
To help you out, here’s a guide providing some insight into business finance, how it works, and why it’s so important.
What is Business Finance and its Functions?
Business finance, also known as corporate finance, is all about managing a company’s money. This includes obtaining funding for the business, allocating financial resources, managing debt, and controlling any financial decisions and operations.
It doesn’t matter how big the business is or what it does, business finance forms an essential part of how it operates. All businesses need some kind of funding to get started. Businesses often also need extra financing to help them grow. Of course, every business also needs to carefully manage how its money is used.
The aim of business finance is to ensure the business operates smoothly, carefully controls any risk related to finances, and ultimately, makes a good profit.
What are the 6 Types of Finance?
Business finance can take on a few different forms. Here is a breakdown of the six different types of finance that exist.
Any money that a business acquires to maintain or run its operations is known as debt finance. With debt finance, the money lender does not gain any kind of ownership in the business. Instead, the business repays the full amount of finance with an agreed-upon interest rate.
Debt finance can be classified into short-term, medium-term, and long-term finance options.
Equity finance is a typical way of raising money for a new startup. This type of business finance is when the business offers shares in exchange for capital. There are many different SME funding options available that fall under the equity finance category.
Public finance refers to any state expenditure. For a business, there are various government funding opportunities that exist. These public funding options are created to help boost different sectors of the economy.
This is the same principle as business finance, but it applies to individuals. From a business perspective, personal finance can include how much an individual takes from the business, and how they manage this money.
As explained above, this refers to all of the financial activities involved in running a business. Corporate finance can include debt finance and equity finance, as well as the day-to-day financial decisions of the business.
This is an alternative form of business funding where private firms help companies raise funds. Private finance applies to companies that are not listed on a securities exchange or cannot obtain business finance on these markets. Private finance plans are often used to fund nonprofits.
Why Is There a Need for Business Finance?
All businesses need finance to start. This could be to purchase stock and equipment, set up premises, or fund the initial stages of the business before it makes a profit. Business finance is the money available to spend on business needs. Without adequate finance, no business will be able to start and operate properly.
It’s also essential that businesses control their finances carefully in order to keep their operations on track. This is why it’s so important to have a strong business finance system in place.
What is an Example of Business Finance?
There are many different examples of what business finance could look like. This could be an entrepreneur approaching the bank for a business loan, a startup seeking angel investment, or a small business applying for a specialized township business funding opportunity like TREP.
The business calculates the risk associated with taking on business financing. They carefully assess what their financing needs are, and compare this to the earning potential that the financing brings.
Once financing is secured, the business needs to carefully manage its finances.
Whether it’s to start a brand-new business or scale up an existing one, business finance is an important part of running any business. Managing finances play an essential role in all business’s daily operations.
Without business finance, no business would be able to grow and operate efficiently. Understanding business finance is therefore one of the most important things for any business owner to get right.