What is Business Finance?

The Basics of Business Financing and how to Obtain it.

What is business finance? It is the process of planning, managing, and controlling a company’s financial resources. Many activities are involved in financial planning, including accounting, investment management, and more.

Business finance is essential because it helps a company achieve its financial goals. Business finance aims to ensure that a company has the necessary funds to operate and grow. Without adequate financing, a company will not be able to survive for long.

There are many ways to obtain financing for a business. One option is to take out a loan from a bank or other financial institution. Another option is to raise funds through equity financing, which involves selling shares in the company to investors.

When might a Business need Finance?

Business finance is one of the most important aspects of running a small business. Keeping business activities going and paying for necessary operating expenses can be difficult without proper business financing. There are a few critical times when business financing will be needed to keep the business running smoothly. 

One typical time when business finance is necessary is a shortfall of cash. Creating a cash flow statement will detail all of the money coming in and going out for the business and will help ensure enough funds to cover expenses. If cash budgets show insufficient funds, you will need additional financing to make up the difference.

Another time when business finance may be needed is when expanding the business, purchasing assets or taking on new projects. It can be a costly undertaking and may require taking out a business loan or selling equity in the company to raise funds.

There are many other times when a business may need more funds, such as a change in business activities, including during periods of rapid growth or when unexpected expenses arise. No matter the reason, it is crucial to understand business finance options to make the best decision for your company.

Financial Statements for Obtaining Business Finance

You will likely be asked to provide financial statements when obtaining business finance. The most common financial statements are balance sheet, Profit and Loss, and cash flow statements.

Balance Sheet

A balance sheet is a financial statement showing the assets, liabilities, and equity at a specific time. It is a critical report when obtaining financing because it helps lenders see what the company owns and how much money is owed.

Profit and Loss Statement

A profit and loss statement, also called an income statement, is a financial statement that shows a company’s revenue, expenses, and profit or loss over time.

Cash Flow Statement

Cash flow statements show the inflows and outflows of cash for a business over a period of time.

These statements are important because they give lenders and investors an idea of the financial health of a business. It would be difficult to obtain the financing necessary to start or grow a business without them.

Investors and lenders will also look at your credit report. It is, therefore, essential to pay bills and debts on time to keep a good credit rating.

Is there any Startup financing available?

If you’re starting a new business in the UK, a few different financing options are available to you. One option is to apply for a business loan from a bank or other financial institution. Another option is to raise funds from private investors. It can be done through crowdfunding platforms or by approaching potential investors directly.

Finally, you could also look into government grants or loans. These are typically available to businesses that are working in certain sectors or that meet other specific criteria. So if you’re starting a new business in the UK, research the financing options available to you to get started on the right foot. An excellent place to get started is on the Startups website.

Before you apply, you will need to put together a detailed business plan. A business plan is a document that outlines the goals and objectives of a business and the strategies needed to achieve them. It also contains financial information, such as projected income and expenses.

Types of Business Finance

There are several different types of business financing available, each with advantages and disadvantages. The best financing type for your business will depend on your specific needs and circumstances.

What is Equity Financing?

Equity finance is a type of investment in which shareholders invest in a company in exchange for an ownership stake. This can be done through private investment or public markets such as the stock exchange. Equity finance can be used to raise capital for various purposes, including expansion, research and development, and working capital.

Equity finance can be a riskier investment than debt, but it can also offer a higher potential return. It is an essential tool for small businesses looking to raise capital. Remember, by raising funds with equity you are giving away part of ownership of your company.

What is Debt Financing?

Debt financing is often seen as a less risky alternative to equity financing, as it does not involve giving up any ownership stake in your business. One way to obtain debt financing is to take out a business loan from a commercial bank.

Commercial banks typically offer loans with fixed repayment terms and interest rates, making them a predictable source of funding. However, approaching lenders can be daunting, especially for small businesses. It is essential to do your homework and be prepared with a solid business plan and financial projections. If you can show lenders that you have a well-thought-out plan for repaying the loan, you will be more likely to obtain the financing you need.

Can I use an Angel Investor?

For small business owners looking to raise funds, angel investment can be a great option. Angel investors are individuals who invest their own money in early-stage businesses. They typically provide smaller sums of money than venture capitalists or other institutional investors, but they can be a vital source of capital for startup companies.

Angel investors usually have a personal connection to the business, and they often provide more than just financial support. They may also offer advice and mentorship to the founders. If you’re thinking of angel investment for your small business, it’s important to do your research and approach potential investors with a well-developed plan. But with the proper preparation, angel investment can be a valuable way to get your business off the ground.

Friends and Family

While it may be tempting to borrow money from friends or family when starting a business, several potential advantages and disadvantages to consider. First, lending institutions such as banks or credit unions typically offer higher interest rates than individuals. This means that the business will pay more in interest over time if they get a business loan from a bank.

Additionally, loans from friends and family often come with more flexible repayment terms, which can be helpful if the business experiences financial difficulties. Finally, borrowing from friends or family can strain personal relationships, especially if the loan is not repaid on time. It is generally advisable to explore other financing options before turning to friends and family for a loan.

What is Business Finance – Crowdfunding

In recent years, crowdfunding has become an increasingly popular way to finance business ventures. Unlike traditional loans or investments, crowdfunding allows businesses to request small amounts of money from a large number of people. Backers typically receive rewards such as early access to products or exclusive discounts in return for their investment.

For businesses, crowdfunding can be a great way to get started without incurring a lot of debt. It can also be an excellent way to gauge public interest in a product or service before making a large investment. However, crowdfunding campaigns can be time-consuming and unpredictable, so businesses should carefully consider whether it is the right option for them.

How do I get a Business Loan?

Getting a business loan can seem daunting, but it doesn’t have to be. The key is understanding what lenders are looking for and being prepared with the necessary documentation. When you apply for a business loan, lenders will typically ask for your business’s financial statements and company operations details.

They’ll use these to assess your business’s creditworthiness and to determine how much of a risk lending to you would be. Lenders also want to see that you have a solid plan for how you’ll use the loan proceeds. They’ll want to know that you have a clear idea of how the money will help your business grow and that you have a realistic repayment plan.

Are There any Alternatives for Raising Finance?

Invoice Factoring

Invoice factoring is an alternative to raising finance for a small business. Businesses sell their invoices to a third party at a discount with invoice factoring. The third party then collects the money owed on the invoice from the customer. Invoice factoring can provide businesses with quick access to cash and give them more time to focus on running their business. Invoice factoring can also be used to improve business cash flow and manage late payments. However, it is essential to note that invoice factoring can be expensive, and businesses should only consider this option if they are struggling to raise finance through other means.

Conclusion to What is Business Finance

In this article, we have looked at what is business finance. The different options for financing your small business are viable, depending on what fits your goals and needs best.

We hope this article has clarified how to raise money for your company without giving up any ownership stake or becoming mired in debt. If you’re still not sure which business finance option is right for you, reach out to a business consultant or financial advisor for more guidance.