How to Finance a Business

How to finance a business is a common question, which comes up in the mind of a number of people who are interested in doing business. There are various methods that can be applied for financing a business. A business finance loan is that type of a loan, which is obtained by the entrepreneurs for meeting a number of commercial purposes.
Whether starting off with a new business or expanding an existing business a finance loan can be of tremendous help. In order to become successful in business, a sound financial strategy as well as a strong financial support is necessary.

The sources of financing a business can be broadly categorized into two types namely debt financing and equity financing. Debt financing involves financing through debts or taking loans and equity financing involves financing through issue of share capital.

A business finance loan can be taken for a variety of purposes which includes the following:
For purchasing plant and machinery and office equipments
For buying and renting offices and premises
For insurance purposes
For working capital prerequisites
For payment of salaries and wages of the employees
For the payment of business expenditures

The various sources of business finance loans include the following:
Bank overdraft
Hire purchase and leasing
Invoice factoring and invoice discounting
Loans
Mezzanine debt
Soft loans and grants
Venture capital

For the convenience of the business, the entrepreneurs can categorize the business finance loans into the following types:
Short terms loans such as bank overdraft
Medium term loans such as government grants, bank loans, hire purchase and leases
Long term loans such as mortgage loans, bank loans, issue of shares by limited companies, and debentures

Sometimes reinvestment of profit is also utilized for financing a business. In this process, a portion of the profit earned by the company is retained and again invested as capital in the future.

The following types of people utilize the business finance loans:
Entrepreneurs of small sized, medium sized, and large business enterprises
People with a bad credit history
People who are planning to begin a new business
People who wish to extend their present business
The main advantage of financing a business through a business finance loan is that a business finance loan is flexible in nature and the repayment periods can be extended. This makes it a convenient option for the borrowers in terms of repaying the loan. With so many options of business finance, how to finance a business is a not a major issue in today’s world.

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Last Updated on : 1st August 2013

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