Business finance describes the means by which business meet their financial needs, either through credit or fund. It is the backbone of any business as it is what determines the day to day operations as well as expansion.
When you are seeking business finance, it is essential to examine the type of finance because this would have impacts on your cash flow and tax obligations.
Before you seek finance, here are things you should do:
- Have a concrete business plan
- Know how much finance you need
- Determine how long you’ll need to pay back
- Establish your ability to pay back.
It is essential that you get professional advice when seeking business finance.
There are two major types of business finance:
Debt finance: This when you borrow money from external lenders, e.g. Banks, finance companies, factor companies, suppliers, invoice finance, etc. The advantage of debt finance is that you remain in full control of your business, have many Options as to loan terms, and the interest on your business loans is tax-deductible. On the flip side, you have to repay within a fixed period which starts soon after approval, you have to use your assets for secure the loan, and repayments may cause cash drain which could make growth.
Equity Finance: this is when you invest your own capital or that of others in exchange for stakes in the business. Source of equity finance include venture capitalists, private investors, government, crow funding, etc. It has many benefits which include;
- It is less risky, and repayment is not immediate.
- Investors can add more skill sets and credibility to your business.
- You have more cash at hand to grow your business.
Its disadvantages include;
- Losing full control of your business as some investors want partial ownership and say in decision making
- Finding the right investor may take effort and time.