BusinessFinancing

Business Financing – Options, Types, Small, Loan, Startup

Business Financing

Business and finance are familiar terms to many people but the real question is what is business financing? Not many people understand this part of economics which is sometimes a problem to corporations, individuals, entrepreneur problem. Business financing is a part of economics that deals with a wide variety of careers and activities related to the management of money and other assets which are valuable. In relation to economics as a topic of study in schools and universities, business finance makes students to become increasingly familiar with investment strategies and the effective management of debt without any form of effect on the assets of the individual and the corporation.

READ: In-House Financing – Requirements, Interest Rate, Dealership

It also increases the familiarity of the students with accounting techniques. Owners of big business corporations sometimes find it difficult to keep their firms as profitable as the small scale business owners who possess the understanding of the principle of finance.

Business Financing - Options, Types, Small, Loan, Startup

Business financing can be in any form; this means that business can be financed in a lot of ways according to the convenience of the individuals or the corporation. Each method of financing has its advantages and disadvantages but business owners mist times go for the methods of business with the highest advantages and the lowest advantages for the effective running of their business and in the formation of new business firms. The two common methods of business financing are debt financing and equity financing. The debt financing is a form of financing that must be paid back to the lender as it forms a liability to the business or the organisations. Equity financing on the other hand gives all the people involved in the business equal rights in participation and in decision making for the corporation due to the fact that they have money or a form of investment in the business and its mode of operation.

READ: Finance Lease – Example, IFRS, Types

Debt Financing

Debt financing in business financing, is one of the two common methods of providing funds for the starting of a business and for its operations. The business owner will look for funds outside the internal organisation. He can decide to get a loan from banks or other private organisations and even from individuals like friends, family and neighbours. The money borrowed by the business owner is usually paid back with either interest of finance charge or without interest of finance charge depending on the situation at hand. Loans depend on the type of individual or organisation providing the funds and they effectively determine the interest rate.

Equity Financing

In business financing, there is another common way of providing funds for businesses is known as equity financing. The business owner will make a decision to sell out some portion of his stock or shares in the company, mostly in percentage to outside investors. Because of this, the investors would be a major part of the business and have a share in the profit when the company starts to add value. The success of the company will no longer be dependent on the business alone but on all its investors. The money realised from all the shares sold to the investors will be used in the running of the business.

READ: Structured Financing – Explained, Investment Banking, Real Estate, Products

Every business owner must however note that each method of financing a business must be dealt with cautiously. In debt financing, the company can liquidate is very prone to bankruptcy if the company has more liabilities than assets. The financial management and financial accounting must be utilised to record how much money is spent and received by the company for its transactions. The payment of the debt must be timely. The debt must be removed from the profit to avoid finance charges as a result of extension of debt payment.

In equity financing, business can be run more easily and can also be very difficult to manage due  to the fact that there is more than one owner of the business at once. Financial accounting which serves as a report of the company activities must always be utilised.

Small Business Financing

  • Capital at hand and if the capital is not enough, get other means of sourcing for fund. You can take up any of the two type of business finance strategy stated before
  • Financial management and financial accounting should be very transparent
  • Payment of tax and others fees and bills.
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Harish Yadav

Finance and market analyst and chief writer on howtofinance. Passionate to read books and articles on marketing and accounting. Also edits other articles and publish them here.

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