types of business finance

types of business finance

Exploring Different Types of Business Finance

1. Introduction to Business Finance

Individual firms use business finance computation data in order to make good decisions about both short-term and long-term financing of the different projects that relate to the important strategic objectives of the firm. Finance is a key part of business operations and provides important information to enable the different stakeholders to interact at a businesswide level. Business finance provides funds for the operations of the firm. It replenishes those funds on an ongoing basis to ensure that financial resources are available in the amounts and at the times the financial decision-makers need them. In the end, business finance is important because it enables organizations to create value, which is a building block of any economic system. These value-creating transactions can be managed nicely through appropriate financial management.

Business finance is a term used to describe all of the activities that are related to managing money antypes of business financed cash for an organization. Businesses can also require investment for growth or expansion and, for this reason, provide opportunities for external investors. The concept of business finance also includes the financial analysis needed to make a business aware of the money it spends and how it can learn to spend it in better ways. Depending on the context, business finance can be discussed from the perspective of an individual firm or as an area of economics.

2. Debt Financing Options

Bank loans are often the most popular form of debt finance for businesses. These tend to offer a range of loan options that can be helpful to companies with excellent credit and a strong business base. However, many banks are also reluctant to provide loans to businesses that are just starting out. Therefore, many businesses expand into other types of debt financing once they start to become established. The issuance of bonds is one of the most common tools used to create debt in the world. The issuer agrees to pay the holder of the bond a certain percentage of the debt at various intervals throughout the life of the bond. Bonds are often viewed as less risky than other forms of debt financing. As such, bondholders are at the front of the line to be reimbursed if the issuer goes into bankruptcy.

In the financial world, the term debt financing is used to describe the borrowing of money as a means of raising capital for the business. Debt financing sources can take many different forms, ranging from a standard bank loan to the use of debtor factoring tools. The type of tools used will depend on the financial standing of the business and the type of assets that the business wishes to use as security to base the funds.

3. Equity Financing Opportunities

Angels manage their own money and are usually successful entrepreneurs, and use business contacts to make more informed decisions. They represent five million Americans who annually invest about $90 billion in promising early-stage businesses that cannot get capital elsewhere. Companies receiving angel money are usually beginning to commercialize a product or idea, but require more financial capital than three F’s (Family, Friends, and Fools) alone can provide. Typically, an angel’s investments average $500,000, and almost one-third of these investments are in the form of equity financing. Industries such as healthcare, retailing, and business products receive the largest shares of angel equity investment funds. Moreover, geographically, the majority of angel investments occur in California.

Equity investment differs from traditional means of securing capital in that equity capital generally doesn’t have to be repaid. If your business is just getting started and has no earnings or cash flow, or if earnings and cash flow are erratic due to your business being in a cyclical industry, equity capital can be a solution to your business’s capital needs. Its injection of cash represents part ownership (equity) in your business and depends on the valuation of your business at that point in time based on the business plan projections. You must be willing to share the profits of your business with these investors. There are two possible types of equity investors: (1) Individual angel investors, and (2) Venture capital professionals who manage a venture capital fund invested in businesses.

4. Alternative Sources of Finance

The alternative sources of business finance include: 1. Overdraft: This allows the business to withdraw more money from its bank account than has been deposited. 2. Asset-based finance: This uses a company’s assets, such as debtor’s accounts, that make money. This can make borrowing money cheaper. 3. Factoring: This can provide immediate cash to a business as soon as it completes a deal. 4. Hire purchase: This is where a business buys a fixed asset over a period of time without paying the full cost upfront. The assets would be used as security while the business is still making payments. Once all payments have been completed, the asset belongs to the business. Large companies often use this method to finance the purchase of equipment. 5. Leasing: This is similar to a hire purchase and involves the payment of rentals over a fixed term, usually 3 to 5 years. The assets never belong to the business, but if regular payments are made, they can use them for the amount of time the lease agreement lasts. At the end of this time, it can either buy the equipment outright, replace it with newer equipment or renew the lease. This is a popular method of financing for smaller companies.

5. Comparing and Choosing the Right Finance Option

1. Feasibility and costs of finance Many business people simply do not have a full understanding of the real costs of finance. That, of course, is not altogether surprising, since banners bearing the slogans of ‘cheapest loans’, ‘rainy day money’, ‘low-cost business finance’ and the like, can be alluring. It is made even worse by such expressions as APRs, flat charges, rate of interest, arrangement fees, and by terms like maintenance check, equity, free reserves, lender liability and cash flow forecasts. There are no hard and fast rules as to the costs of money. Different lenders, for example, apply peculiar weightings to a number of wide-ranging variables, including inflation, government competence, lender reputation, cost of funds and tax liabilities. Because a number of variables apply, much care should be taken in any attempt to properly review and compare the costs and the terms on which various types of business finance are offered. The truth is that finance costs are often more than we think. Interest and charges may not be the entire story. When the true costs of business finance are considered, sound judgments can readily be made about the types of finance and the amounts that you can reasonably afford.

Finding the best finance solution for your business rests on an understanding of the types of finance available and the different terms on which it is offered. It also calls for a comparison of the savings or benefits that a particular finance facility delivers against its cost. Costs may be expressed in terms of the money you pay out, and/or the security you have to provide.