What Is Business Finance?

If you’re preparing to start a business — whether it’s a retail store, restaurant, hotel, advertising firm, construction company, etc. — you’ll need to secure financing. Unfortunately, many business owners are unfamiliar with financing, let alone know how to secure it. By familiarizing yourself with the term “business finance,” you can overcome the financial challenges associated with your business’s startup costs, giving you a greater chance of success.

What Is Business Finance?

Overview of Business Finance

Also known as business financing, business finance refers to the procurement of money for the purpose of starting or growing a business. It involves connecting with a bank, financial institution or lender to acquire funds for your business’s operations. You can then use those funds to purchase goods and services associated with your business.

Why Business Finance Is Important

You can’t expect to run a successful for-profit business with little or no capital. According to Chron, lack of capital is one of the most common reasons new businesses fail. If your business doesn’t have enough capital, you may struggle to purchase things like equipment, inventory, marketing services and more.

No two businesses have the exact same financing needs. Some businesses require more money to fund their operations, whereas others require less. Regardless, though, all businesses need money to grow. Therefore, business finance is critically important to your new business’s success.

The Different Types of Business Finance

While all business finance involves the procurement of money to start or grow a business, there are different types of business finance, each of which functions in a different way.

Specifically, business finance can fall under one of two categories: debt-based finance or equity-based finance. Debt-based finance, as the name suggests, involves borrowing money from a lender, such as a bank or alternative financial institution, under the agreement that you’ll repay it. It’s mutually beneficial for both your business as well as the lender. You’ll receive capital almost immediately, which you can use to grow your business, whereas the lender will earn money over time by charging you interest on the borrowed money.

Equity-based finance, on the other hand, involves selling some of your company’s equity shares to an investor. It can also provide you with the necessary funding to start and grow your business. With equity-based finance, however, you aren’t required to pay back to the procured money. Rather, you can keep it at the cost of some of equity shares.

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