Need of Finance in Business

When starting a new venture or a business, finding the sources to finance the business is one of the most critical steps every entrepreneur or business person takes. Finance is undoubtedly the blood of the business that promotes easy functioning and helps businesses grow effectively. Without proper sources of business finance, it is nearly impossible to start and run a business. 

Today, in this article on the need for business finance, you will get a detailed understanding of business and business finance along with the need for business finance. So, without further ado, let’s get started with the need for finance in the Business study material.

What is a Business? 

A business is referred to as an entity engaged in industrial, professional, and commercial activities etc. Generally, there are two types of businesses; profitable and non-profitable organisations opened for social causes. These include NGOs. The term business is expressed as the collaborative activities and efforts of every individual who is a part of a business and working to attain maximum profit. Before starting a new business or a venture, a huge amount of money or capital is required that is the strength to start the business. 

Concept of Business Finance 

The term business finance can be described as the funds required to start, operate, and expand the business in the near future. No matter what type of business you’re planning to do, it needs funds to make purchases of tangible goods, including machinery, furniture, factories, buildings, and so on, along with intangible goods such as technical expertise, trademarks, patents, and so on. 

Not just long-term assets, a business needs funds to manage everyday activities. These include paying salaries to employees, purchasing raw materials, paying other bills such as electricity and so on. As a result, a sufficient amount is required before stepping into the business world to face competition in the market.

Classification of Finance Sources 

There are several sources through which a business can raise funds. These are as follows –

The period basis – This is further classified into three major parts – 

• Long-term finance source – The long-term sources of business finance can be used for more than five complete years. Equity shares play a significant role in arranging these kinds of funds. 

• Medium-term finance source – The medium-term sources of business finance last only for more than a year but less than five years. This category includes borrowing money from commercial banks, public deposits, financial institutes, and so on. 

• Short-term finance source – Short-term finance lasts for only a year. The most common example of this source is working capital loans. 

Ownership basis- This is further classified into two major parts – 

• Owner’s fund – Also known as the owner’s capital, the owner’s fund is given by the company owners. There are several ways to raise capital. It includes issuing retained earnings, preference share, equity share, and so on. 

• Borrowed funds – As the name suggests, the borrowed funds include the capital acclimated through loans or borrowings. It is one of the most popular sources of finance for any business. 

Need of Finance in Business 

The importance of having enough finance for your business cannot be stressed enough. Below, we have discussed the need for business finance. Let’s have a look – 

• Finance in business is required to make one-time purchases such as investing in inventory, land, machinery, furniture, factories, and others, along with meeting everyday expenses such as paying bills, giving salaries, and so on. 

• In case of unforeseen circumstances, finance plays a greater role in dealing with contingencies without drastically affecting the overall business position. 

Examples of Finance Sources 

Obtaining finance from any source can be intimidating at first. However, it is a decision that needs to be taken with utmost care and caution as it can affect the overall financial positioning of your company from the inside. Therefore, it is essential to explore a number of sources that are worthwhile. Since it completely depends on the business owner to decide the right mix of finance sources. Some of the common finance sources are equity, retained earnings, term loans, letter of credit, debt, debentures, working capital loans, euro issue, venture funding, and so on.

Conclusion 

With this, we come to an end to our study material on the need for business finance. When starting a new venture or a business, finding the sources to finance the business is one of the most critical steps every entrepreneur or business person takes. Obtaining finance from any source can be intimidating at first. However, it is a decision that needs to be taken with utmost care and caution as it can affect the overall financial positioning of your company from the inside. After all, finance is the blood of an organisation. 

In this article on the need for finance in business, we studied business and business finance in length. We covered the several sources through which a business can raise funds and examples of those sources so that all business owners make the right choice. We hope the need for business finance must have helped attain a greater understanding of this topic.