Business Finance - Know its Meaning, Importance, Types & Sources

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Feb 25, 2021Business Loan

Finance is the heart and soul of any enterprise. It plays a vital role right from the establishment of a business to play an important role in driving its growth. Today, business finance has come a long way from traditional methods of financing. Let us understand more about this topic:

What is Business Finance?

Business finance refers to funds availed by business owners to meet their needs that may include commencing a business, obtaining top-up funds to finance business operations, obtaining finance to purchase capital assets for the business, or to deal with a sudden cash crunch faced by the business. Prominent loan providers have your back and provide finance to cater to the needs of your business.

What is the Importance of Obtaining Business Finance?

The importance of finance cannot be sufficiently stressed. A couple of advantages of obtaining finance can be described as follows:

  • Business finance can help entrepreneurs purchase land, capital assets and other assets without much difficulty and can focus solely on commencing the operations of the business.
  • With access to finance, purchasing land and machinery, upgrading to the latest software and technology is easier, allowing you to walk towards ensuring the highest standards of quality in your industry.
  • Access to finance can help you deal with contingencies better without disrupting the operations of the company.

What are the Types of Business Finance?

The major types of business finance are outlined below. You can evaluate each type and assess the suitability for your business:

  • Equity Finance
    In this type of finance, the investors are the owners of the company to the extent of their investment. Equity finance could consist of finance brought into the business by shareholders or owners. Typically, an investor contributes a large sum of money towards the business in exchange for share in the business. When the business starts generating profits, investors earn the benefits depending on the number of shares they own.
  • Debt Finance
    Debt finance is what its name suggests. It is money that is borrowed from a lender and has to be repaid at a predetermined rate of interest over time.
Must Read: 10 Types of Business Loans in India

What are the Sources of Business Finance for an Entrepreneur?

Obtaining finance can be intimidating for entrepreneurs. It is a decision that should be taken with caution because it is bound to leave a deep impact on the finances of your business. In such a situation, exploring various sources of financing is extremely worthwhile. Finance can be classified based on various parameters and it is completely up to the entrepreneur to choose the right mix of finance for his business.

The various sources of funds can be classified into two main categories:

External Funding

  • Through Debt:
    Entrepreneurs can rely on borrowings in the form of loans from lending institutions to cater to the unique requirements of their business. Loan providers offer quick approval of loans of up to Rs. 50 lakh to ensure that you can make the best use of the opportunities that come your way. However, the catch is that business loans are usually only given to existing businesses who have achieved a certain level in terms of annual turnover and profits, and have a stable income for at least a period of 2 years. Depending on the lender’s policy and the type of loan, other eligibility criteria may also apply.
  • Through Equity:
    Entrepreneurs can pitch their business idea / project to investors to request for funding. If their pitch is accepted, then investors give them the capital they need in exchange for a share in the business. The investors may also then appoint a management team to oversee the use of funds and business operations. This type of funding is especially suitable for startups or small businesses which are looking towards expansion.

Internal Funding

Internal funds are generated by the owners of the enterprise in form of preference shares, equity shares etc. It helps owners retain their control over the company in form of shares and therefore drive the major decisions relating to the company. It also helps them avoid taking on debt. However, this type of funding is possible only if the owner / promoter has sufficient funds to avoid approaching lenders or investors.

What are the Documents Required to Apply for Business Finance?

Loan providers insist on a few basic documents to evaluate your eligibility for a business loan. The business loan documents required include a copy of your KYC documents, a copy of your address proof, latest bank statements, proof of income and documents to prove the existence of your business. If the loan amount you seek is higher, you may also have to pledge collateral such as property or financial assets, and documents pertaining to these will also be required. Log into the website of your loan provider or get in touch with a customer care representative to obtain a complete list of the documents required to process your application.

Must Read: How to Apply for a Business Loan (Step by Step Guide)

Confused about how much money you are eligible to borrow for your business? A business loan EMI calculator can help you calculate the approximate amount you can borrow while ensuring that EMIs payable do not eat into the operating expenses of the business. If you do decide to opt for a business loan, make sure that you repay the instalments on time to make sure that you continue to maintain an excellent credit score in the long run.

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