Meaning of Business Finance: Advantages and Disadvantages
Business Finance means the funds and credit employed in the business. Finance is the foundation of a business. Finance requirements are to purchase assets, goods, raw materials and for the other flow of economic activities. Let us understand in-depth the Meaning of Business Finance.
Meaning of Business Finance
According to B.O. Wheeler Meaning of Business Finance includes those business activities that are concerned with the acquisition and conservation of capital funds in meeting the financial needs and overall objectives of a business enterprise.”
Business is identified with the generation and circulation of products and services for fulfilling of needs of society. For successfully doing any operation, business requires money which is known as business finance. Therefore, funds are known as the lifeblood of any business. A business would not function unless there is adequate money accessible for use.
Read Also: The Definition, Types and Importance of Finance
Read Also: The Definition, Types and Importance of a Business
The capital contributed by the businessman to establish the business isn’t adequate to meet the financial needs of the business. Consequently, the businessman needs to search for an option to generate funds.
A research of the financial needs and options to fulfill those needs must be done with a specific end goal to arrive at effective financial management to maintain the business.
The fundamental necessities of business would be to buy a plant or apparatus, or it could be to buy raw materials, development of a business that prompts more enrollments, paying wages and so on. The money related necessities of a business can be classified as follows:
- Fixed Capital Requirement: In order to begin a business, money is required to buy fixed assets like land, building, plant and machinery. This is called the Fixed Capital Requirement.
- Working Capital Requirement: A business needs funds for its day to day activities. This is known as Working Capital Requirements. Working capital is required for the purchase of raw materials, paid salaries, wages, rent, and taxes.
- Diversification: A company needs more funds to diversify its activities to become a multi-product company e.g. ITC.
- Technology upgrading: Finances are needed to adopt the latest technology for example use of particular software and the latest computers in business.
Business finance is the funding we need for commercial purposes. Put simply, it is the money business people require to start, run, or expand a business. If you already have the money you use it. However, if you don’t there are several options.
Investment finance, which we also call equity finance, means selling part of your business. You can do this by selling shares to an investor. However, bear in mind that you will lose some control.
If the investor buys shares, he or she will also receive a share of the profits your business makes.
We call firms or individuals that make their living by providing business finance venture capitalists.
Advantages of Investment Finance
New skills
Investors may bring new opportunities and skills to the business, such as exporting or marketing. In fact, many people say that their success was partly due to the know-how the investors brought.
No repayments
If you sell shares, you will not need to take out a loan. In other words, you won’t have to make repayments or worry about interest rates. Therefore, your cash flow will be better than with a loan.
Shared risk
You’re not alone: your investor shares the business risks with you. Some people do not like operating on their own.
Disadvantages of Investment Finance
Loss of independence
You may find it time-consuming. You will also have less freedom to make your own choices. Additionally, it may become expensive – paying dividends may cost more than repaying a loan.
Minor shareholder
If you sell too many shares, you may end up with a minority stake in the business.
Personality clash
You may not get on with the investor or investors.
Business finance – crowdfunding
Crowdfunding is becoming an increasingly popular way of getting business finance. We also call it crowd-source capital or crowd financing.
In most cases today, people use the Internet for crowdfunding. The aim is to get as many small investors as possible. There are websites dedicated to crowdfunding.
Business finance – loans
Some people prefer to borrow the money in the form of a loan and repay over an agreed period.
With a loan, you do not lose your independence. Furthermore, you still retain your stake in the business.
People usually get business loans from banks. However, community development finance institutions and other businesses also offer loans.
In fact, many successful businesses began with loans from friends or relatives.
In a typical loan arrangement, the borrower has to pay back the capital plus interest. The capital in this context means the original amount.
Business finance – grants
A grant is a specific amount of money that the government, a company, or any organization awards. They may award the grant to a business, an educational establishment, or a person.
Grants have two major advantages. First, you do not have to pay back the money. Second, you do not lose control of your company. In other words, you do not need to sell shares.
However, grants are not that easy to get.
Most grants come with certain specifications. Those specifications may clash with your plans. This means that you might have to alter how you proceed.
Other forms of financing your business if you need money are factoring and invoice financing.
Alternatively, you could talk to your bank manager and arrange an overdraft. In fact, most banks today offer overdraft application facilities online.
