You can not run an enterprise without finance, that is why we can say finance is the blood of the business. Finance plays a vital role in the establishment of any business. Today, business finance has come a long way from traditional methods of financing. In this article, we will discuss Business finance, and why a company requires money.
What is Business Finance?
Business finance refers to the funds availed by business owners to meet their requirements which might include starting a business, keeping operating funds (the funds which are required ired by day-to-day business), purchasing capital assets (assets including land, building, machinery, etc, which are essential for running a business), and emergency funds (which are essential for dealing with natural calamities, certain accidents, etc.) Prominent loan providers have your back and provide finance to cater to the needs of your business.
What is the Importance of Obtaining Business Finance?
The importance of finance can not be sufficiently stressed. A couple of advantages of obtaining finance can be described as follows;
- Business finance will help entrepreneurs in purchasing capital assets like land, buildings, machinery, etc., and other assets without much difficulty and can focus solely on commencing the operations of the business.
- With access to finance, purchasing land and machinery, upgrading to the latest software and technology is easier, allowing you to walk towards ensuring the highest standards of quality in your industry.
- Access to finance can help you deal with contingencies better without disrupting the operations of the company.
Why Does Business Need Finance?
We can say money is the fuel of every business, you can also neglect the size of the business here. However, sometimes a business faces monetary issues and a shortage of funds. In such situations, taking the help of loans provided by the various banks and financial companies will help you to overcome the shortage of money. The influx of cash can be used for multiple purposes. It could range from enhancing work capital, expansion, purchasing a stock, hiring more staff, or refinancing to pay off existing debt. Now, let us discuss the six common reasons that most businesses may need finance at some point.
1. Finance Expansions To Production Capacity
The consequences of not having enough capital can be dire for businesses looking to grow and expand. Hence enterprises opt for external funding to incorporate new technology and purchase assets like innovative machinery to upgrade their facilities. This increases efficiency and production capacity which helps in fulfilling expansion plans.
2. To Develop the New Products in the Market
Entrepreneurs are always looking for opportunities to spread out, flourish and take their business to the next level. Modernization and diversification are excellent growth strategies. Capital funding can be used to develop, test and launch new products in the market.
3. To Enter in New Market
With growth and expansion, it’s inevitable that businesses want to enter a niche market or target a new clientele base. The initiative to explore fresh avenues involves in-depth research, well-rounded marketing strategies, promotional campaigns, recruitment of skilled and talented staff, setting up of retail outlets among other things. And yes, all this requires a tidy sum of investment.
4. Takeover or Acquisition
As a part of its growth strategy, an enterprise may consider scooping another company or combining forces with a like-minded firm to form a new entity. While both mergers and acquisitions come with potential gains, the undertakings are expensive and involve a hefty investment.
5. To Pay for the Day-to-day Running of Business
To keep the ship afloat and ensure that all the operations are running smoothly, businesses need to have enough working capital. They may sometimes require a cash injection to tackle short-term obligations. These could include day-to-day expenses like paying vendors for raw materials, wages to employees, rent, clearing of invoices, overhead costs, regular supply of inventory and more.
6. Research and Development
Research and development (R&D) involve incorporating new technologies, developing unique products and services or enhancing the existing ones. This measure is used extensively by companies to explore new opportunities, penetrate fresh markets and attract a skilled workforce to stay ahead of the curve. However, R&D programs are expensive and require large capital investment. Many businesses, especially small establishments don’t have the resources to shoulder the expense. They approach lenders for financial assistance to leverage their R&D efforts successfully.
What are the Basic sources of Business Finance for Entrepreneurs?
Obtaining finance can be intimidating for entrepreneurs. It is a decision that should be taken with caution because it is bound to leave a deep impact on the finances of your business. In such a situation, exploring various sources of financing is extremely worthwhile. Finance can be classified based on various parameters and it is completely up to the entrepreneur to choose the right mix of finance for his business. The various sources of funds can be classified into two main categories;
Entrepreneurs can rely on borrowings in the form of loans from lending institutions to cater to the unique requirements of their business. Loan providers offer quick approval of loans of up to Rs. 50 lakh to ensure that you can make the best use of the opportunities that come your way. However, the catch is that business loans are usually only given to existing businesses who have achieved a certain level in terms of annual turnover and profits, and have a stable income for at least a period of 2 years. Depending on the lender’s policy and the type of loan, other eligibility criteria may also apply.
Entrepreneurs can pitch their business idea/project to investors to request for funding. If their pitch is accepted, then investors give them the capital they need in exchange for a share in the business. The investors may also then appoint a management team to oversee the use of funds and business operations. This type of funding is especially suitable for startups or small businesses which are looking towards expansion.
Internal funds are generated by the owners of the enterprise in the form of preference shares, equity shares etc. It helps owners retain their control over the company in form of shares and therefore drive the major decisions relating to the company. It also helps them avoid taking on debt. However, this type of funding is possible only if the owner/promoter has sufficient funds to avoid approaching lenders or investors.
The bottom line is that most businesses experience a need for cash inflow at some point in their existence. Whatever be the reason, it’s important to weigh the funding options available very carefully. The peer-to-peer lending platform is a good choice to tide over a financial crunch. It’s not only convenient but provides business loans with greater flexibility, at lower interest rates and minimum paperwork.