The Basics Of Financing A Business

Business finance is the process of raising funds to start or expand a business. Visit IIFL Finance to know more about the basics, types of business financing, etc.

15 Oct,2022 11:54 IST 45 views
The Basics Of Financing A Business

The primary question you must answer before you launch a business is: How will you fund it? Fortunately, many business financing options are available if you are an entrepreneur who needs cash to get operations up and running. This article discusses the types and business finance basics.

What Is Business Finance?

Business finance is the process of raising funds to start or expand a business. Initially, business owners encounter financial requirements for purchasing capital, managing cash fluctuations, meeting demand-supply issues, and investing in equipment and machinery.

Having liquid funds is essential to the success of any organisation. As a result, financing is necessary for every expenditure, irrespective of the organisation’s size.

What Is The Importance Of Business Finance?

The importance of small business finance is as follows:
1. Business ventures with a good amount of financing will take less time and effort to get off the ground.
2. Access to business financing enables owners to procure raw materials as needed for production.
3. Business finance helps companies pay their dues and other obligations.
4. When you have business finance, you can manage uncertain risks and contingencies.
5. When the business has sound financial standing, it attracts talented employees and highly efficient technology.
6. You can save on taxes with a business finance loan. Interest payments made by a business are tax deductible.

Types Of Business Finance

Debt finance and equity finance are the two types of business financing.

Debt Finance

Debt finance is borrowing money and repaying the loan with interest. The repayment structure makes this business loan model popular with business owners. Credit financing can be tax deductible, and the interest rates are more affordable than equity financing. This way, you can plan your instalments accordingly.

Types Of Debt Finance

• Bank Loans:

Bank loans can help you finance important purchases or expansion projects by lending you a lump sum amount. However, bank loans have stricter eligibility criteria.

• Business Credit Cards:

Credit cards are more readily available and easier to manage than bank loans. Their main drawbacks are high-interest rates and fees, but they are a good option for small purchases.

• Invoice Finance:

With invoice financing, you can obtain financing by leveraging outstanding customer invoices.

Equity Finance

Equity finance involves acquiring funds in exchange for a stake or part of ownership in a company. With this financing type, you avoid cash flow problems caused by debt financing. Equity financing also doesn't check your credit history.

Equity financing, however, isn't for everyone; some individuals would like to maintain ownership in their company.

Types Of Equity Finance

• Venture Capital:

High-growth companies with scalability tend to take this route as venture capitalists devote their time to their investment’s success. A VC tends to invest a large sum expecting a significant return on their investment. As a result, audits are commonly used as preventive measures.

• Crowdfunding:

The popularity of crowdfunding has increased recently. A successful promotional campaign is crucial to the success of crowdfunding. Businesses don’t need company audits and vetting in this case. However, you may not always succeed in raising the amount you need.

• Angel Investors:

An angel investor is similar to a venture capitalist but usually invests when the business is just getting started. Since angel investors are wealthy and take immense risks, finding the right one can be challenging.

Take Advantage Of IIFL Finance Business Loans

IIFL Finance, India's top financial services company, can help you meet all your financial needs with a business loan. Fill out our online loan application, upload your bank statements, and upload your KYC documents to get your loan approved in under 30 minutes. Getting a business loan has never been easier! Apply now!

Frequently Asked Questions

Q1. What are the disadvantages of equity financing?
Ans. With equity finance, you have to forfeit a stake in the company. Additionally, new investors may want to be involved in daily business operations.

Q2. What is crowdfunding?
Ans. A business can borrow small amounts of money from numerous people to finance its launch using crowdfunding.

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