Business finance refers to the process of managing, acquiring, and utilising funds to run a business successfully. It is a broad term that includes various activities such as accounting, financial planning, investment analysis, and decision-making.
The goal of business finance is to ensure that a business has sufficient capital and resources to meet its operational needs, invest in growth, and generate profits. Businesses rely on finance to make informed decisions regarding their expenses, revenue, investments, and cash flow, among other factors.
What are the different sources of business finance?
1. Financial institutions
One of the best ways to meet your business expenses is to apply for a business loan. All you have to do is meet simple eligibility criteria and submit the required documents. If your business is 3 years old and you have a credit score of 685, you can apply for a business loan from Bajaj Finserv and get up to Rs. 55 lakh to meet your business' expenses.
2. Angel investors and venture capitalists
Equity capital is another type of business financing. If you are a start-up or a new firm, you might not have adequate business vintage to qualify for a loan. In this event, you can reach out to angel investors and venture capitalists for financial aid. These investors offer funding in return for equity and profits.
3. Accounts receivable or invoice financing
You may not be able to fund business expenses like purchasing raw materials or staff's salaries if your accounts receivables are unpaid. If this is the case, you can opt for invoice financing and use unpaid invoices as collateral to get funds. Leading financial institutions offer an invoice financing loan to help businesses address a liquidity crunch.
4. Inventory financing
Inventory financing is a secured loan where a company pledges its inventory as collateral. This credit option is suitable for small businesses that don't have access to other financial solutions.
5. Business credit cards
This is one of the most convenient sources of business finance for urgent needs. It is an unsecured credit facility that doesn't require any assets to be pledged.
There are various other sources of business finance too, like peer-to-peer lending, crowdfunding, and others.
Classification of sources of funds
Sources of funds refer to the various types of financing that a company may use to acquire the necessary capital to finance its operations, growth, or investment. There are two main categories of sources of funds - internal sources and external sources.
Internal sources of funds:
- Retained earnings: profits that are reinvested into the company instead of being distributed to shareholders.
- Sale of assets: selling underutilised or non-core assets can generate funds for the company.
- Working capital management: optimising the management of current assets and liabilities can free up funds to finance short-term needs.
External sources of funds:
- Equity: the company raises funds through the sale of shares to investors, which may include private equity firms, venture capitalists, or individual investors.
- Debt: borrowing money from lenders, which may include banks, financial institutions, or bondholders.
- Grants and subsidies: receiving government assistance, such as research and development grants or subsidies based on business performance.
- Trade credit: receiving financing from suppliers by agreeing to defer payments for goods and services.
Examples of sources of funds
Sources of funds can be external or internal. External sources include raising capital via equity, debt, trade credit, factoring, and subsidies from the government. Internal sources include retained earnings, sale of assets, and working capital management.
Companies choose the source of funds that suits their financing requirements and objectives, ensuring that debt obligations can be serviced and equity investors earn expected returns. Examples of sources of funds used by companies widely are loans from banks, venture capital funding, initial public offerings, and lines of credit. Companies may use multiple sources of funds to finance their operations, growth, and expansion plans.
Understanding the various sources of funds is crucial for companies to fund their operations, growth, and investment. Companies should identify their financing needs and choose the most appropriate sources of funds accordingly.
Frequently asked questions
If you need finance for your business, look no further than the Bajaj Finserv Business Loan. You can get a high loan sanction going up to Rs. 55 lakh with only minimal documentation, and repay it over a long tenure of up to 8 years. Our nominal business loan interest rate makes the loan even more affordable.
You can apply for this loan online by clicking on the ‘Apply’ button at the top of this page. You will be taken to our online application form. Fill it out with the required details and get your business loan offer instantly.
There are no limitations to the usage of business finance. You can use it to manage any and all expenses related to your business. These may include:
- Maintaining working capital
- Buying stock for inventory
- Transportation and logistics
- Rent and other overhead costs
- Operations costs
- Purchasing or upgrading machinery and equipment
- Expanding to a new location
The eight sources of business finance in India include:
- Equity shares
- Preference shares
- Public deposits
- Commercial banks
- Non-banking financial companies
- Venture capital
- Angel investors
Each source has its own advantages and disadvantages, and businesses should carefully consider their options before choosing a financing option.