Money is considered to be the lifeblood of any business. It is responsible for all the transactions for its working starting from the day to day activities to expansion programs. Without money, the venture can come to a full stop in no time. So, to keep it in existence, business financing becomes a vital task.
What is business financing?
Business financing is the process to procure the required funds by the business. It may be for the establishment, proper functioning, or expansion purposes.
Sources of Business Financing
There are various sources to procure financing. Internal Sources and External sources are the two broad categories of obtaining funding. Internal sources include the funds obtained from the business. External sources include the funds procured from sources outside the organization.
The five most widely used types of financing are:
- Personal Savings: In case of urgent needs, a business owner can tap into his savings as a source of funding. Before choosing this source for funding purposes, it’s essential to have clarity of these two crucial questions:
- What is the amount of personal savings with the organization?
- How much of that amount is the organization willing to use up?
After answering these questions, the business can decide whether they have to use the personal savings of the organization or not.
2. Debt Financing: It is the same as taking loans from banks or banking merchants. The business can apply for credit as per their requirements. The company will then have to pay back the principal amount and interest within a pre-determined period.
3. Relatives: Family and friends can be a good source of getting funds. They can lend it in the form of a loan or can invest in equity. The method is quick, but there is a higher risk of non-payment, which may lead to sour relations with them.
4. Angel investors: These are equity investors who are ready to invest in your business. They can be investment companies or executives who have the money and are willing to invest in ideas that interest them. A well-established network can do wonders in getting financed by these angel investors.
5.Venture Capitalists: This source is for new startups. These are private bodies who put their money on ideas that have a high potential to flourish. They invest by buying shares of the new venture and become its partner in business.
Factors affecting business financing:
Various factors affect the decision to go for a particular financing option. They are:
- Nature of business: Some business requires heavy machinery resulting in more funding and vice versa.
- Size of business: A more significant venture will consume more finances
- The technique used in production: The size of funding will depend if the company is labor intensive or capital intensive. The former requires a lower investment.
- Cost of promotion: Heavy marketing and promotion will require more funding.
- Economic and social trends in the market: It is the tendency of the people at that time to invest in a particular type of industry.
- Time incurred on selling the products: An enterprise that requires more time for selling the goods or products will require higher investment. This funding is needed to arrange inventory and look after working capital needs.
- Other factors: Other factors like the scale of distribution may prove to be a deciding factor for an investor.
Based on these factors, the investment company will decide to pursue business financing or drop the option.
Financing is a crucial aspect of any business. If correctly selected, it can prove to be very helpful in its growth and development. But a wrong decision may end up leading to its closure. It is for this reason that you need the expertise of a reliable company like Business Backer. It helps in providing the best suitable source of business financing by evaluating every risk and factors. It provides safe and affordable services. Their association will help to take your business to new heights.