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Commercial Finance forms the central component of a business enterprise. The significance lies in forming a robust framework for the administrative establishments, as well as enhancing the scope of operations. The drivers of growth are accentuated and put in proper perspective with the proper application of strategic and marketing principles of business finance. Thanks to the availability of financial technology and appropriate data analysis methods, the modern business finance models differ from traditional ways of financing.
What is the definition of business finance?
Business owners need different kinds of funds to expand and sustain their business operations. Business commencement begins with a huge need for capital opportunities. Business finance is an expansive umbrella that covers the financial opportunities and its costs for business owners to purchase business capital asserts, meet demand-supply issues, cash fluctuations, and to invest in the necessary machinery and equipment at the start of the business.
The need for credit is an indicator of a thriving economy. With the entrepreneurial bug getting the better of modern youth, the winds of change are driving towards a change in the intellectual and industrial elite of the nation. There is a need for proper and trustworthy finance avenues among the small and medium industries. Top-class loan providers offer the best interest rates and tenure options for fulfilling the business needs of small business people and tech entrepreneurs.
What is the Significance of availing Business Finance?
Finance is the central fulcrum on which the giant business machine navigates in the highly competitive capitalist markets.
- The demand for cheap capital is at its peak due to the increase in the business environments’ favorability quotient.
- Businesses are built on the basis of availability to cheap and sustainable loans. Hence there is always the advantage of understanding the various facets of business finances and their influence on determining the future trajectory of profitability.
Benefits of Business Finance:
Entrepreneurs have the initial burden of finding the right place to set up shop. Prime real estate can be purchased by using business finance methods. Once the financial impediments are out of the mind, the business owners can focus and train their precious brain space into the strategic management of the business and allied marketing activities.
Benefits:
1. Manufacturing industries in developing countries such as India and China are heavily dependent on the quality of infrastructure for sustaining business operations.
2. Access to quality tools and machinery can make all the difference between future profitability and bankruptcy.
3. The latest technological advancements in data science and information technology have led to the increased demand for quality data professionals in the areas of business finance.
4. Getting the right amount of loans can help entrepreneurs to invest in quality skilled talent and augment the technical capabilities of the organization in areas of strategic leadership in the aspects of marketing and branding.
The modern business environment is fraught with risks and there is no easy solution for getting the right amount of funds at crucial junctures. Business financial planning helps to understand the risks that businesses face such as:
- Decrease in sales
- Attrition of top-class talent
- Regulatory bottlenecks
- Economic depression
- Union strikes and natural disasters
Types of Business Finance
Business loan details offered by top banks/NBFC:
|
Lender |
Rate of Interest |
Loan Amount |
Tenure of Loan |
|
Lendingkart |
1.5 to 2% per month |
Up to a maximum of Rs 2 cr |
up to 36 months |
|
HDFC Bank |
15.75 to 21.20 % |
Up to a maximum of Rs 50 Lakhs |
12 months to 4 years |
|
Kotak Mahindra Bank |
12 % |
Up to Rs 20 Core
|
Up to 5 years |
|
Fullerton India |
13-16% |
Rs 1 Lakh to Rs 2 Crore |
12 months to 5 years |
|
Karnataka Bank |
10.3% |
Rs 3 Lakh to Rs 2 Crore |
Up to 120 months |
Depending on the scope of business operations and size of the balance sheet, the enterprises can be divided into small, medium and large categories. Business finance planning follows prudent financial principles and one of them is that requisite funding should be provided depending on the actual future value of the business concern.
The following are the different types of business finance methods:
Equity Finance
In this type of finance, company ownership lies with the investors. The actual measure of their ownership is determined by looking at the extent of their investments. The initial stakeholders and investors will bring in different quantum of capital to get the business get going. Investors generally claim a stake in the ownership of the company as well as the future profits.
Debt Finance
Modern businesses need to take on a lot of debt to meet the strategic initiatives of the business in terms of business expansion in new markets. The cost of acquiring new subsidiaries, hiring a new workforce and expanding the reach of operations all entails significant costs that may deplete the capital savings.
Importance of Business Finance in Financial Operations
Financial planning and Audit Control
The financial operations in the short term are interweaved with the planning and audit departments, who collectively determine the right amount of finance needed for future operations. The financial planning arena includes the computation of:
- Profit indices
- Financial ratio analysis
- Forecasting of sales and appropriate budgeting activities
- Expanding the WorkForce
- Acquisition of new business partners
- Budgeting needs of the Marketing department and sales department can be harmonized
Financial Ration Analysis – A significant component of Business Finance
The balance sheet of firms contains many technical items which do not mean much sense to the C-suite management. The tools of financial technology can be used to find an analytical and comparative way to translate that figure into actionable insights. Also known as the liquidity ratio, as the name suggests, the levels of immediate liquidity can be assessed using this ratio. The different advantages of Financial Ratios analysis in Business Finance are:
- Initial public offers
- Stock exchange prices
- Weekly inventory turnover
- Exact amounts of account receivable from vendors using analysis of financial ratios
In other words, the business health of the organizations can be objectively evaluated by understanding the relationship between different financial ratios.
Profit Planning
The future designs of the enterprise to expand into new business territories can be effectively vetted using the data intelligence from various financial ratio indicators. The future growth of the company depends on cracking the right numbers with the audit and credit departments.
Business Finance entails the following responsibility to the managerial class in the company with regards to their core functionalities:
The entire demand of the product is estimated by the marketing department based on the usefulness of the past marketing campaigns, and their final influence on the actual sales. The entire capacity of production and their means to generate it are effectively gauged by the production managers. The means of production are an important entity to determine the future health of the business and the business finance models should offer adequate structural funds to meet the various contingencies such as:
- Depreciation
- Updating of software
- Acquisition of the latest technical equipment
- Investing in tech startups to ensure that there is no competition to your core product
Role of Financial managers
The nuances of business finance can be achieved by striking a harmonious working relations ship between the various line departments of strategy, finance, sales, production and Operations. The responsibility of the financial managers is to:
- Accurately estimate the availability of funds
- Frequent analysis of new account receivables
- Correct evaluation of inventory levels and health of fixed assets
The future sales should also be predicted by the managers of Business Finance. The right machinery can be purchased with the latest design features when the correct capital amount is presented in its budget. The purchase of the right infrastructure is the ultimate objective of business finance in manufacturing companies.
What does Business Finance mean to Small and Medium Industries?
1. Manufacturing Sector
The capital costs of initial equipment and hiring of technical talent can be defrayed by applying the correct methods of business finance. Since the quantum of business loans and finance is greater in the manufacturing sector, the financial indices such as capital to assets ratio, Debt to Service Obligations should be consistently evaluated during the audit stage.
2. Small Businesses
Business finance in small business firms deals mainly with the establishment of retails presence for the product range offered. The ultimate objective is to meet the social media marketing requirements such as Google Ads, Third-party affiliate marketing, paid ads and getting on board, the modern dazzle of retail marketing-Influencers.
Sources of Funding for Business Finance
Even though after taking all the precautions in maintaining an excellent credit history for all the board members, applying for a business finance loan from major and reputed lenders can be a tad intimidating for entrepreneurs and retails merchants.
Businesses are built on the foundation of competition for capital. The right quantum of capital at the right times makes all the difference between a profitable enterprise and a stagnant one. Exploration of trustworthy business sources should be made by entrepreneurs to ensure that the company starts off at the right level.
The different types of fund sources in Business Finance are:
1. Through Debt:
Lending organizations can disburse loans to small business owners by vouching for their debt. The loan providers offer assurances to the vendors of the business. Also called a variant of Bank Guarantee, the maximum quantity of the loan can go up to Rs 50 Lakh. This quantum of loan can be judiciously segregated into the various expansion, marketing and strategic initiatives of the business enterprise.
Debt Financing comes with certain limitations:
- Existing businesses should display adequate amounts of capital as annual turnover. The exact levels depend on the financial health of the business and the risk propensity of the lenders
- Stable income levels should be achieved across all the revenue-generating departments of the company, as viewed in bank statements for the last 2 years.
- Debt Financing is a huge financial commitment on part of the lender and they assume a significant amount of risk. It is only natural that the vetting process of the entrepreneur and the business will be thorough and pervasive.
2. Through Equity
Angel Investing is one of the most popular methods of Equity Financing. The entrepreneur should be willing to part with an ownership stake to the angel investors. This is most commonly visible in tech start-up financing where the existing product t demand and future trends of the consumers are all too volatile to predict a consistent trajectory for the start-up.
The angel investors have the right to appoint their representatives to the management team or the board of directors. This helps in achieving synergy between the entrepreneur and angel investors into the strategic initiatives of the company and achieves future profitability.
3. Internal Funding
Companies can also opt for equity and preference shares to raise capital from internal sources. This business finance model is deployed in cases where the management is not willing to bring in new faces in the board room. This mechanism helps to provide a singular strategic initiative according to the leadership vision of the entrepreneurs and business owners.
Required Documents for Business Finance Application
The business loan documents are evaluated to determine the eligibility for a business loan:
- KYC documents
- Address Proof documents
- Collateral Provision Option
- Income Proofs
- Detail Financial Statements audited by third-party agencies
- Business Incorporation documents
- Memorandum of Association and Articles of Association documents
Business Finance is the perfect way to evaluate the health of your business in terms of comparison with the credit facilities offered by banks. Entrepreneurs who are looking to translate groundbreaking business ideas into gigantic business empires should get a basic understanding of the different financial parameters that are focused on by lending institutions. An EMI Calculator is the best way to get an approximate idea of the total quantum of business loans required.
Business Finance FAQs:
1. How interest rates are applied for loans taken under the Business Finance Category?
The interest rates of the different debt servicing companies differ depending on the credit quality of the company. The Debt finance obligations are similar to the working of the credit card model where the entire credit bill can be paid off using cheap forms of credit from another financial institution.
2. As an entrepreneur, Should I take legal representation in case of Equity Financing?
Company Law deals with the finer aspects of the business ownership where issues of equity finance are concerned. Top Lending institutions have in house legal experts who can suggest ways to reduce the debt burden for fledgling entrepreneurs and to those small business owners who are still enthralled by the traditional methods of financing such as banking and private lenders.
3. What is the relationship between financial ratios and current assets of the company?
The Financial ratios include the relationship between current assets and current liabilities. The important financial ratios indicators such as Capital Adequacy ratio indicate the ability of the enterprise to meet its future debt obligations.
4. How Revenue forecasts are managed for applying Business Finance models?
The forecast needs of all the important line departments such as Marketing, Sales, Social Media management and Operations need to be effectively managed using the tools of financial forecasting by using the latest algorithms and data science applications.
5. Should Entrepreneurs maintain financial documents of the business?
Majority of the lending institutions are particularly asked for audited financial statements for loan applications. It is in the interest of modern day entrepreneurs to become finically savvy and maintain a good credit history so that future loan applications can be sanctioned with higher quantum.
6. How the loan amount in a Business Finance model should be decided by the entrepreneur?
Business Finance is offered by understanding the technical and administrative aspects of the enterprise. The entrepreneurs are at complete liberty to select the quantum amount. However it is advised to take a balanced approach when utilizing the capital amounts, after taking into account the recessionary features of the present financial situation across the globe, due to the pandemic situation.
7. What is the nature of contractual agreement in case of Angel Investing?
The company should sign all-encompassing agreement with the representatives of Angel Investors, which make its financial records transparent. Having such a thorough process helps both the business owner and the entrepreneur in making wise and prudent business financial decisions.
8. Can Tech entrepreneurs get investor help using Business Finance models?
Tech savvy entrepreneurs who have a unique idea and are looking to scale up their business using the various instruments of social media marketing can find equity financial, a highly beneficial method. Also, already established companies can seek equity financing to expand into new geographical areas.
9. Should I enter personal information in the EMI Calculator for Business Finance loan?
No. Business Finance loan EMI calculators completely value your financial and personal privacy. Only generic information such as income levels are asked and initial estimate is provided.
10. What is the time frame to know the loan eligibility and final sanction decision for small business finance loans?
Depending on the type of lender, the initial sanction email is sent to the prospective borrowers in a matter of minutes. After which a request for additional documents is made, and upon examining them, a final decision is made within 3 business days and the same is communicated to the applicant through email and SMS.
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