Any business, be it of whatsoever scale or kind, revolves around the concept of financing. And, the past few years have ushered in several evolutions in the ways of financing a business, like a channel financing and also a flurry of institutionalized and non-institutionalized sources of raising funds.
The latter is an opportune occurrence for businesses, especially small and medium-scale enterprises, for which raising finance in any climate can be a challenging prospect.
However, it has also become difficult to navigate through the thickets of ways to finance a business and raising funds.
It is particularly flummoxing for small businesses and enterprises that are heading towards a growth phase.
Thus, it is quintessential for businesspersons to not only zero in on the device of financing but also on how that pertains to specific business requirements.
Methods of financing a business in 2020
How a business is financed can vary depending on the type and size of an enterprise. Nevertheless, the specific areas of business finance and monetary devices to address those are discussed below –
- Capital financing
It is a part of corporate finance that predominantly involves deliberations and decisions concerning which prospective expenditures, capital projects, and/or planned investments are worth pursuing to increase an organisation’s value. It also involves deciding on ways to raise capital for the same.
It is a quintessential financial division as any organisation’s growth and future profits largely hinge on it. Ipso facto, it is all the more critical for small businesses as their room for growth and expansion is considerably immense.
There are several essential technologies that every small business needs like cloud-based solutions to enhance their operational value.
Typically large businesses can opt for capital financing via equity and/or debts, while small businesses have to rely on debts like loans or own revenue predominantly.
Alternative devices that businesses can opt for capital financing are –
- Crowdfunding – This method of raising finance has gained considerable traction in recent years owing to the advancement of technology and its integration in the commercial sphere. Businesses can consider this option to raise fund for short-term projects.
- Venture capitalists – Businesspersons can also consider involving a venture capitalist to finance its capital expenditures. They usually invest in a promising venture with the potential to provide considerable returns on their investments.
- Supply chain finance
It is a subset branch of corporate finance that deals with a business’s supply chain vis-á-vis short-term liquidity. Supply chain finance is related to the daily operations of a business directly pertinent to revenue generation. Thus, adequate channel financing is one of the most crucial outlays for a business.
Also, it is not only crucial but also a consistent effort on the part of a business owner. Individuals need to ensure that a supply chain is running without bottlenecks with sufficient working capital fuelling it. Thus, individuals might consider a working capital loan to fund its business operations to create a robust monetary footing.
Moreover, businesspersons must also go over their supply chain from time to time in order to ascertain there is no fat in the process and operations are running at maximum efficiency with optimal use of resources – monetary and otherwise.
Methods that businesses can opt for channel financing are –
- Invoice finance – Businesses can consider leveraging the outstanding payment from their debtors to acquire funding up-front. Those with poor credit often utilize this avenue to raise funds for working capital requirements. However, businesses need to pay a fee as a percentage of the credit amount that can prove expensive. For instance, if a business pays a 4% fee for a 60 days’ advance, then it equals to 24% interest per annul.
- Loan from financial institutions – Companies can also opt for a business loan from a financial institution to mitigate their working capital requirement. It does not require any collateral and incurs a comparatively lower cost of credit.
Reputed financial institutions like Bajaj Finserv also provide pre-approved offers on loans to simplify and expedite the process to avail credit. Such offers apply to a large assortment of financial products like business loans, personal loans, etc.
Regardless, businesspersons should duly weigh their options to raise funds against the areas of funding like channel financing to make a well-informed decision. Other parameters that individuals should analyse in conjunction are