What Is Business Finance And Its Importance?
What is business finance?
The new business you have recently envisioned is ready to come to reality or you’re finally thinking of growing your current business. The only thing that worries you is financing. If you don’t have enough funds to finance it yourself, you must find the correct small business funding option. Here’s what you need to know before diving into the pool.
Types of Business financing
Broadly, business financing falls under one of the two categories:
- Debt, in this case, you borrow the amount and pay back the amount with added interest.
- Equity finance is when you get the funds by selling a significant share to the investors.
This is not the end of categories, there exist many types of finances that fall within these main categories.
Which type of funding is correct for your business?
Some funding types are faster to acquire, some demand more security, some are cost-effective and some have their strings attached to other related funds. You need to understand your situation and choose the best option for your specific preference and need.
Your business set up or upgrade needs you to be sure of your financial arrangement that you finally resort to.
How much business funding do you need?
Understanding the amount of money you require and the duration you need it for is the first step to choosing the right finance type. Here are some tips to help you make the right decision:
Starting a business
- Business building
- Make a list of all the things required to get started. The list must include details such as building fit-outs, equipment, initial inventory, vehicles, uniforms, website development, and promotion.
- Source of income in the early days
- Work out the salaries, lease amount, suppliers, and utilities from week to week. Know how you will pay for these expenses. What is the amount in hand when starting the business and will it cover all the necessary expenses. How much more cash will you need?
- Hidden costs
- Businesses usually forget to set a budget for the things that are not predominantly visible on the surface but definitely exist, like insurance, permits, rental bonds, marketing costs to boost initial sales, utility connections, bank fees, website hosting, and transport costs.
- Make space for unplanned outcomes
- Things might not always go as planned so make sure you keep aside some funds for times of crisis as a buffer. The idea is to stay in business and not merely get into it.
Buying a business
- Get an evaluation
- An expert evaluation will help you better decide what the business cost and if it’s worth, and it will tell you if expensive equipment is due to be replaced.
- Check the previous accounting books or financials
- Let an expert accountant take a look at the accounts, this will help him better understand your money situation and plan the initial budget accordingly so that you don’t go broke in case the business witnesses a not so great start.
- Include all the costs
- Will you require rebranding, bringing in new staff, purchasing tools, and equipment, or trying some new marketing ideas? Estimate one and all of the investments to be catered.
Know your business better
- What loans you must know?
- A working capital loan is a loan which ensures that everything is running swiftly. The daily expenses of a business can be hard to bear if a reputed customer doesn’t pay on time, or in case an unplanned expense comes in, or in another case, you have had a bad month of sales in general.
- How often would you be required to rely on loans?
- Avoid high-interest rates wherever you can
- Working capital loans are administered for the short-term and are pretty flexible. It is due to the fact that they’re high on interest rates. It would get pretty expensive if you need a lot of them. Get the review and view of your accountant on the situation.
Growing a business
- Make a list of all the possible costs and expenditures involved in the improvement process, item by item. Acquire an estimate for each one of the commodities. If it is required for you to operate on a diminished capacity during the duration of changes, consider that too.
- Be proactively ready to work out what would happen to the operating costs post the expansion. You may require a bigger inventory and more staff. Check the budget and what it covers or doesn’t cover, or if you can acquire a working capital loan.
- Now that you have figured out the costs, make an estimate return analysis. Unless you know some improvements are imperative to show and improve the profit scenario for the business. Do a cost-benefit analysis.
- Take into consideration the possible finance options, whether you can finance it yourself or if you would need vendors? Maybe you can go out and negotiate a deal with the vendors. Explore every possible aspect and prospect.
- Remember that if you invest your own cash into a purchase and save nothing for future use, it can backfire. If all your options exhaust, you may have to go in to take a short-term loan after some time which may be at a higher rate of interest.
Get help from an expert
Business finance requires watchful eyes to ensure that every penny spent is spent for the correct use. The slightest of miscalculation here and there can have heavy consequences. Businesses strive to be profitable but they also have to understand how working capital can help their business scale new heights. FinanceCorp is focused on assisting you with easy finance solutions. The expert professionals suggest solutions tailored for your specific situation. Get in touch to make your financial tasks easy on 08 9417 5550.