What Is the Meaning of Business Finance?
Business finance is a term that encompasses a wide range of activities and disciplines revolving around the management of money and other valuable assets. Business finance programs in universities familiarize students with accounting methodologies, investing strategies and effective debt management.
Financing, simply put, is the act of bringing money into an organization. Businesses can be financed in a number of ways, each of which features its own advantages, disadvantages and unique features. Common methods of financing a business include taking on debt and taking advantage of credit arrangements, financing through equity investment or earning income through investment products that bear interest or increase in value.
Properly managed debt can help a small business to finance steady or rapid expansion. Loans from banks and credit unions can be structured in a number of ways; borrowers with established reputations and high credit scores have access to larger amounts of debt capital at lower interest rates with more friendly fee structures. Small business owners should have a plan for building up their company’s credit score over time.
Equity financing can be obtained via several avenues. Investment from venture capitalists or angel investors can provide a significant influx of capital, not to mention access to expert guidance, for businesses in the startup phase. More established businesses can incorporate and sell shares of stock to the public to raise large amounts of debt-free capital, at the expense of diluting ownership and control of the company among a wider range of individuals and organizations.
Making wise and profitable investments can finance business operations with no strings attached. Investing in conservative products such as blue-chip bonds, interest-bearing bank deposits and trusted dividend-paying stocks can help a business to diversify its income, hedging itself against risks in the marketplace.
Each type of financing should be used with caution and vigilance. Taking on too much debt can dilute company performance metrics such as the debt-to-assets and times-interest-earned ratios, as well as reducing profit margins. Financing too heavily through equity can cause original company founders to lose control of the company completely over time. Investing too much money in risky investments can cause a company to lose its cash reserves quickly.
“Small business owners must have a solid understanding of the principles of finance to keep their companies profitable” commented Salomón Juan Marcos Villarreal, president of Grupo Denim.