Finance is the availability of money that you can invest in your business. Every business dream requires cash to turn into reality. As your business grows, the more money will be required to finance your projects. Finance for business is also required to meet the working capital requirement.
Here are a few reasons why you require finance for business:
Every business requires capital to purchase assets, pay salaries and to buy raw materials. You also need finance to meet the working capital requirement of the business. Every business requires time to generate positive cash flows and requires finance to meet this shortfall in cash.
When the business grows it requires capital to introduce higher production capacity and new technologies. Introducing new technology in business is expensive and is a long-term investment that the company makes. All these changes require long-term sources of finance to meet the capital requirements of the company.
Developing and marketing of new products is expensive. Companies launch new products to increase their sales and to improve customer satisfaction. To market and develop products, companies need money that can be sourced from internal cash flow or financed from external sources.
Companies planning to launch their products in new markets have to incur expenses on research and marketing. New markets include selling their products in a new geographic area, or getting new customers in the existing area of operation. If the company’s internal cash flows are inadequate to finance new market launches, then the company may require additional finances.
When the business buys a new product, brand or company, it may require finance to fund its acquisition.
If the business is relocating to a new area then finances may be required to fund the transfer of employees and machinery.
Most businesses require finance to meet their working capital requirement. Businesses need to pay the suppliers, employee salaries and other sundry expenses. Businesses receive cash for the sale made only after a certain period.
To meet the expenses, companies cannot rely on the money received from the sales made. They usually take a working capital loan, which is repaid, once payment is received by the company.
When choosing a source of finance you need to consider the following:
The finance required would decide the source from whom you can borrow. Usually private lenders are able to finance small amounts. If you are looking to get a large amount, you may have to approach a bank or a financial institution.
If you need money immediately, then you may have to approach private lenders who charge high rates of interest.
However, if you can wait, then you can get finance from banks and other financial institutions at low rate of interest.
Select the finance option which charges you the lowest interest rate. Internal cash flow is the best way of meeting the finance requirement of the company.
You need to analyse the risk reward ratio before you opt for any source of finance. Even if you have an internal cash flow to meet your requirement, make sure you analyse your risk before making any decision.