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Business finance – definition and meaning

Business finance is the funding we need for commercial purposes. Put simply, it is the money business people require to start, run, or expand a business. If you already have the money you use it. However, if you don’t there are several options.

Investment finance, which we also call equity finance, means selling part of your business. You can do this by selling shares to an investor. However, bear in mind that you will lose some control.

If the investor buys shares, he or she will also receive a share of the profits your business makes.

We call firms or individuals that make their living by providing business finance venture capitalists.

Business Finance - three main reasons for it
There are three main reasons for business finance. You may wish to start a business or expand one. You may also require additional funding to run the business.

FT.com/lexicon.com has the following definition for business finance as:

“Money lent by a bank or other financial organization to a business for a particular purpose, and the lending of money in this way.” Many would say that this definition is too narrow because business finance could come from an individual. In fact, the money could have many sources.

Investment finance – advantages

New skills

Investors may bring new opportunities and skills to the business, such as exporting or marketing. In fact, many people say that their success was partly due to the know-how the investors brought.

No repayments

If you sell shares, you will not need to take out a loan. In other words, you won’t have to make repayments or worry about interest rates. Therefore, your cash flow will be better than with a loan.

Shared risk

You’re not alone: your investor shares the business risks with you. Some people do not like operating on their own.



Investment finance – disadvantages

Loss of independence

You may find it time-consuming. You will also have less freedom to make your own choices. Additionally, it may become expensive – paying dividends may cost more than repaying a loan.

Minor shareholder

If you sell too many shares, you may end up with a minority stake in the business.

Personality clash

You may not get on with the investor or investors.

Business finance – crowdfunding

Crowdfunding is becoming an increasingly popular way of getting business finance. We also call it crowd-source capital or crowd financing.

In most cases today, people use the Internet for crowdfunding. The aim is to get as many small investors as possible. There are websites dedicated to crowdfunding.



Business finance – loans

Some people prefer to borrow the money in the form of a loan and repay over an agreed period.

With a loan, you do not lose your independence. Furthermore, you still retain your stake in the business.

People usually get business loans from banks. However, community development finance institutions and other businesses also offer loans.

In fact, many successful businesses began with loans from friends or relatives.

In a typical loan arrangement, the borrower has to pay back the capital plus interest. The capital in this context means the original amount.

Business finance – grants

A grant is a specific amount of money that the government, a company, or any organizations awards. They may award the grant to a business, an educational establishment, or a person.

Grants have two major advantages. First, you do not have to pay back the money. Second, you do not lose control of your company. In other words, you do not need to sell shares.

However, grants are not that easy to get.

Most grants come with certain specifications. Those specifications may clash with your plans. This means that you might have to alter how you proceed.

Other forms of financing your business if you need money are factoring and invoice financing.

Alternatively, you could talk to your bank manager and arrange an overdraft. In fact, most banks today offer overdraft application facilities online.

Video – Sources of Business Finance