As it is a widely known fact, finance is required by the business to be established. To smoothly and efficiently run its operations is popularly called business finance. Businesses require sufficient funds to undertake numerous activities.
To be able to produce goods or provide services, any business requires capital. Longer goals of expansion and growth can only be achieved with the help of sufficient funds. Business loans in Mumbai are available to promote business growth.
According to the recently conducted survey, SMEs represent around 99% of all firms. It is the main source of employment. It generates 50% to 60% of value added on average. Moreover, SMEs are vital. It has multiple sources of business finance. It aims to nurture local communities. And also driving economies’ and societies’ major transitions.
Business finance requirement
The financial requirements of a business can be categorised into two parts:
- Fixed Capital Requirement: Building a business requires investing funds in the fixed nature of assets. Finances buy fixed assets such as Plant & Machinery, Land & Buildings, Furniture and Fixtures, etc. Such funds are invested in fixed assets. It will remain invested for a longer time frame.
- Working Capital Requirement: The money required for everyday business is known as working capital. Mainly used for holding current assets. It pays off the current liabilities of the business.
The fixed amount or working capital requirement differs from one business to another. A business involved in everyday trading will need less fixed capital. However, more working capital is needed when a business is involved in manufacturing. It will always require investing more in fixed capital. Manufacturing businesses require less working capital.
For suppose, Manya is a small-scale business owner. She runs a successful coffee shop in her city. After years of positive growth, she decides to expand her business. For the same, she requires funds. These are offered from various sources.
Sources of Business Finance
A partnership or Sole Proprietorship does not have options to arrange funds to operate a business. A company has options from which it can arrange funds to operate a business. The former raises funds from friends and family. Also, as a loan from a bank. The latter raises funds from various sources. Different finance sources can be classified into three major categories, which are:
1. based on Period
- Long-term: The long-term sources fulfil the financial needs of an enterprise for over 5 years.
- Medium-term: When required funds are for more than 1 year but less than 5 years. In that situation, the company opt for medium-term finance options. For example, borrowings from commercial banks, public deposits, etc.
- Short-term: these are required for a period not exceeding one year. For example, trade credits, loans from commercial banks, and commercial papers.
2. based on Ownership
- Owner’s Fund: such funds offered by the owner of the enterprise are called the Owner’s Fund. For example, shares and retained earnings.
- Borrowed Fund: For example, such funds are borrowed from outsiders as loans.
- based on the Source of Generation
- Internal Source: these funds generated from inside the business are known as internal sources of funds. For example, collection of receivables and disposal of surplus inventories.
- External Source: such funds involve those sources that lie outside the organisation. For example, suppliers, lenders, and investors.
Conclusion
To sum up the discussion, businesses cannot survive without proper financial management. It is what business finance is concerned with. A company can set up its objectives with business finance. Organisations require money, such as fixed assets. It requires working capital for growth and development.
Aims, even though this may vary from one organisation to another. Thus, when selecting the most suitable source of financing for your enterprise, it is vital to take into account factors. It involves the risk profile associated with running a firm, among many more.
