Basic principles of business finance

Any person who has or will attempt to start a business needs to finance his/her idea.  So what is the definition of business finance?  All the money that is made available to a borrower by banks, Saving and Credit Cooperative Societies (SACCOS) and other sources for commercial use through short term loans and equity share capital will amount to what is widely called business financing or capital injection. 

Trying to understand business matters is not for novices only.  No.  It is always critical for every business person to be aware of the different modes that they can adopt in order to finance a start, expansion, rejuvenation or even a complete redirection of their ventures.  A clear grasp of these issues will enable one to know the best sources of financing, the modes of repayment and how they are suitable both in the short run and in the long run.

Basics of business financing

In order for an investor to make a choice from the many financing products available in the market, there is a real necessity to know and separate the level and role of financing. 

Currently, businesses can receive money from venture capital which refers to investment groups that are wiling to finance a business with the intention of participating in management and making profits.  They may also opt for angel financing.  This involves individuals who are willing to finance particularly high risk ventures for higher returns. (David Pressman).  It is also possible to seek corporate venture capital financing. 

The only differentiation from venture capital is that corporations and not individuals with interests may finance the business.  Personal savings and loans from banks and other lending institutions equally apply and are, in fact, widely used.

For some seasoned investors, it is definitely easy to separate and adequately use these sources to finance their business.  This may not be the case for many start-ups.  The reasoning behind this argument, which is almost 90 percent true, is that it is normal for lenders to extend a lot of trust to these who have already shown “mettle” with their success or perceived success.

A case for incorporation of businesses prior to financing

The reasons for this trust is may be obvious or not depending on who is about to borrow and who thinks their proposal is better.  Usually, lenders will lay greater importance on the previous financial performance of a business before releasing finances.  Business associations will also matter when individual and corporate financiers are sought. 

For example, S corporate and C corporate can easily access credit than sole proprietorships and some partnerships.  It is therefore critical to identify, in advance, the vehicle that you intend to use as n investor.  For new investors, they may get reprieve from some loopholes existing in law including the provision that one may purchase a shelf company. 

If therefore, one has been conducting business as a sole proprietor, they may want to have it “swallowed” by the shelf company and thus earn a reputation of longevity in the market.  This will most probably earn them easier access to business finance. 

Seek professional advice

However, it is critical to seek guidance from experts lest one commits fraud and other unethical practices involving non disclosure.  Advice may be sought from financial specialists, tax advisors attorneys and these already in the line of business that an investor intends to pursue.

Each of the mentioned sources of business financing has its own intrinsic requirements and may be simple or complicated depending on who is in receipt of the information.

References

1. http://www.moneymatters101.com/startingabusiness/bust/bustb.asp
2. http://www.corporatecredit.biz/businessloan/types-business-loans.php
3. http://books.google.co.ke