Understanding Small Business Finance Name: Chandan Saha Centre: Shyambazar Course: Finance Business Finance is based on conservation of capital fund and other business activities. It includes a wide range of activities and disciplines integral with the management of money and assets. Small business owners must have an understanding of the principles of finance to keep their companies profitable. Business finance is classified based on time period, ownership and control, and source of generation of finance. Small business finance is defined as the means by which a current business owner gains money to start a small new business, purchase an existing small business or brings money into an existing small business for future business activity. It also known as franchise financing. There should be a good business plan before one thinks of financing it. While planning the business, taxes and other incurred expenses should be taken care of.
The four basic reasons that lead to borrowing in small business finance are: for starting the business, purchasing inventory, expanding the business, and strengthening the financials of the firm. There are two types of financing for different small business: Traditional Small Business Financing Options: The traditional small business financing has two options: 1. Debt Financing (Borrowing Funds) 2. Equity Financing (Selling of ownership) 1. Debt Financing: A method of financing in which a company receives a loan and promises to pay the loan. When a firm raises money for working capital or capital expenditures by selling bonds, bills, or notes to individual and/or investors. In return for lending the money, the individuals or institutions become creditors and receive a promise that the principal and interest on the debt will be repaid.
There are several types of debt financing, which are discussed as follows:
• Bank loan: The most common type of financing is a commercial bank loan. Loans provided to a small business for various purpose by a lender. These loans enable the small business to secure funds. A small business loan may provide other incentives to the borrower, which could minimize the borrower’s expenses.
• Loans from Relatives or Own source: Business owners can borrow funds from their relatives or own source without exchanging the amount for equity in the company. Against, a formal agreement, though repayment terms are often flexible, is spelled out by both parties to acknowledge the capital infusion is debt, not equity.
• Overdraft: A bank provides overdraft facility to the organization. The bank establishes a limit to the account holder and the business owner is allowed to withdraw up to that limit.
2. Equity Financing: It is the method of raising the capital by selling company stock to investors. In respect to it, the shareholders is allowed to get ownership interest in the company. There are also certain other business financing solutions that includes asset-based financing, factoring and credit cards.