Business Finance: Definition, Importance and Components

Business finance is the act of securing economic support to supply funds for your business expenses.

Anyone who knows anything about business will tell you that to make money you have to spend money, and businesses often require assistance to secure funding for growth and development.

The business world is fuelled by money, at times can be harsh and unpredictable, so we need to know how to plan and source funds for those times when we need a little extra cash.

That, in a nutshell, is the business finance definition. But what are the different kinds of business finances to choose from?

Types of business finance

Finance options are broken down into two categories: Debt finance, and equity finance.

Debt Finance

Debt Finance is the process of borrowing an amount of money with the promise of paying it back with interest. Business owners like these business loan models because of the repayment structure. The interest rate is often lower than the amount you give up through equity finance and the interest is tax-deductible, so you can devise a suitable payment plan based on your own financial forecasting without having to forfeit a stake in the business. Or, if you choose Square Loans you will pay off the loan as you go, through your day-to-day sales.

Types of debt finance

  • Bank loans: Lump sum payments both big and small for important purchases or expansion ventures. There is an application process involved with strict lending criteria, requiring collateral and a thorough business plan detailing the use of the loan, making these sometimes difficult to acquire.

  • Business Credit Cards: Easily available and simple to manage compared to a bank loan. Interest rates and fees are the main drawbacks, but for small-scale purchases, they are a fine choice.

  • Invoice Finance: A way of securing financing via outstanding customer invoices. This allows you to forego the long wait it can take for payments to come through, and use those invoices for up to 95% of the total invoice value as a cash advance.

Equity Finance

In equity finance, funding is exchanged for part ownership or stake in the business. This form of financing avoids the burden that debt financing has on your cash flow situation, there is no negative effect on credit history and the opportunity for company growth through the newly formed partnership with the financer.
Giving up a stake in the company is not for everyone though, it’s common for investors to take a share in profits, and your new investment partner may want to involve themselves in the control and operation of the business, so if you foresee these aspects causing issues for your business you may want to take a different approach to business financing.

Types of Equity Finance

  • Venture Capital: High growth potential businesses with scalability have often taken this path as venture capitalists are highly devoted to the prosperity of your company. Audits are quite common as precautionary measures since venture capitalists aim to invest large amounts with the prospect of seeing a large return.

  • Crowdfunding: Over the last 10 years or so, crowdfunding has seen a huge rise in popularity. They don’t require any auditing or vetting of the company, but the effectiveness of these crowdfunding campaigns are heavily reliant on how successful the promotional campaign is. There is a higher risk of not raising the funds you desire and that’s where the trade-off lies.

  • Angel Investors: Similar in nature to venture capitalists but unique in the way that they generally invest in the early stages of a business’ lifespan. Angel investors are individuals with an incredibly high net-worth taking large risks on start-ups, so they are hard to come by.

How to choose the right finance type for your business

The values you hold dear and the vision you have for your company are all things you’ll need to consider when deciding how to finance your business. One way to do this is by asking yourself a few questions:

  • What is the money for? Will it be used to improve or maintain a cash flow situation? Is it just to repay another debt? Looking at the reason for your funding will give you a good starting point on figuring out what type of financing is most suitable.

  • How much do you need? Some types of business financing simply don’t offer larger sums of money. Answering this question can eliminate a lot of options and make the choice clearer.

  • Will you need financial help in the long-term or short term? Certain business finance options will only provide one-time funding offerings for start-ups, others specialise in providing more continued, long-term agreements.

  • Does the risk outweigh the reward? Lots of companies turn to financing as a means of betting on the success of a business plan, they just need the capital to get it off the ground. If the plan fails, they’ll either be left in debt and a failing enterprise or have given up a stake in the business with not much to show for it. Business finance by definition brings an inherent risk, so due diligence in analysing it is a must.

Introducing Square Loans

The stress of paying off a loan is not for everyone, but Square offers a financing solution that works with you, to help you realise your ambitions and pay back your loans at a reasonable pace.

Square’s repayment structure is based on your sales, with no ongoing interest. This means no more stress about having to increase sales to meet repayment needs.

We understand that sales numbers fluctuate, so you’ll pay less on those slow days and make up for it a little more on the better days. The application process is simple, and you’ll never have to bother with scheduling payments ever again. It’s all done automatically, and relative to your business size, which is why more and more business owners are choosing Square over the big banks for their business loans.

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The next move is yours with a small business loan

This article is only for educational purposes and does not constitute legal, financial or tax advice. Make sure you consult a professional regarding your unique business needs.