Functions of Business Finance

Strength and soundness of business depends on the availability of finance and competency with which it is used. The abundance of finance can do wonders and its scarcity can ruin even a well established business. Finance increases the strength and viability of business. It increases the resistance capacity of a business to face losses and economic depression. It is just like a lubricant, the more it is applied to the business, the quickly the business will move. Following headings explain the importance of finance to business:

(1) Initiating Business: Finance is the first and fore most requirement of every business. It is the starting point of every business, industrial project etc. Whether you start a sole proprietary concern, a partnership firm, a company or a charity institution, you need ample amount of finance. It is equally important for profit seeking and non-profit activities. It is equally important for a multinational organization and for a free dispensary.

(2) Purchase of Assets: Finance is needed to purchase all sorts of assets. Even if credit is available some down payment is to be made. Mostly finance is needed at the start of business for the purchase of fixed assets. These fixed assets consume a large amount of initial investment of the entrepreneur, so he may face liquidity difficulty in running day to day affairs of the business.

(3) Initial Losses: No business attains high profit on the first day of commencement. Some losses are normal before the business reaches its full capacity and generate enough revenue to match cost. Finance is necessary so that these initial losses can be sustained and business can be allowed to progress gradually.

(4) Professional Services: Certain business need services of specialized personnel. Such personnel have rich experience in specialized fields and they can provide useful guidance to make business profitable. Nevertheless these services are costly. Finance is always needed so that services of such professional consultants can be hired.

(5) Development: Business is always exposed to change. New innovations and emergence of new technologies replaces old techniques out of market. So in order to remain in the market, it is needed to keep the business well equipped with all emerging tools and techniques. This required finance. New technology is always expensive as it is better than others. So finance is needed to purchase new equipment and keep the business running.

(6) Information Technology: Information technology has now changed the geography of the business battle field. The home markets have now extended virtually to other comers of the world. The whole world can be your customer or competitor. To face such a fierce competition, IT is needed. Skills and competency in IT can perform miracles. But finance is again the decisive factor. It is very much needed to incorporate expensive IT products in the business.

(7) Media War: The advertisement and promotion have now become a vital elements for the success of business. The way a businessman approaches a customer and convinces him to purchase his product has become more important than the quality of product. With advertisement on International media, a businessman can reach the minds of millions of people around the globe. However, advertisement is a luxury which every business can’t afford. Huge finance is required to meet advertisement expenses.

(8) Resource Management: Finance is very essential for efficient resource management. Resources here include capital and human resources. Maintenance of plant and equipment and training of employees all need finance. Establishment of new industrial units, expansion of plant capacity, hiring of well learned skilful laborers – all
these factors can lead to huge revenue but at the first place they need finance to start with.

(9) Stock Investments: These investments are those which are made to hold ample stock of raw materials in hand. Bulk purchase of raw materials is profitable in a sense that purchase discount can be attained and there is no danger of production halts. So companies most often hold huge amount of stocks and raw materials. But such an investment can be made only if a company has sufficient capital or finance to carry out its daily operation easily besides holding huge stock.

(10) Combating Risks: Everything is exposed to one or more risks. A business is also exposed to variety of risks. These risks include natural hazards, burden of any huge liability, loss of market or brand name etc. Finance is needed to make business powerful, so that it can sustain occasional losses and liabilities.

What Kind of Financing is Right for Your Business?

Most businesses need financing. Unless you won the lottery or inherited a fortune most people start a business with either their own funds or a combination of their funds and financing. Even an established business needs financing at one time or another.

Cash flow is different than profits and profits do not guarantee money in the bank. Entrepreneurs need financing for inventory, payroll, expansion, develop and market new products, to enter new markets, marketing, or moving to a new location.

Defining and selecting the right financing for your business can be a complicated and daunting task. Making the wrong deal can lead to a host of problems. Understand that the path to getting financed is neither clear nor predictable. The financing strategy should be driven by corporate and personal goals, by financial needs, and ultimately by the available alternatives. However, it is the entrepreneur’s relative bargaining power with investors and skills in managing and orchestrating the finance drill process that actually governs the final outcome. So be prepared to negotiate with a financing strategy and complete financials.

Here’s a brief rundown on selected types of financing for commercial ventures.

Asset-Based Lending

Loans secured by inventory or accounts receivable and sometimes by hard assets such as property, plant and equipment.

Bank Loans

A loan that is repaid with interest over time. The business will need strong cash flow, solid management, and an absence of things that could throw the loan into default.

Bridge Financing

A short-term loan to get a company over a financial hump such as reaching a next round of venture financing or filling out other financing to complete an acquisition.

Equipment Leasing

Financing to lease equipment instead of buying. It is provided by banks, subsidiaries of equipment manufacturers and leasing companies. In some cases, investment bankers and brokers will bring the parties of a lease together.

Factoring

This is when a company sells its accounts receivable a a discount. The buyer then assumes the risk of collecting on those debts.

Mezzanine Debt

Debt with equity-based options, such as warrants, which entitle the holders to buy specified amounts of securities at a selected price over a period of time. Mezzanine debt generally is either unsecured or has a lower priority, meaning the lender stands further back in the line in the event of bankruptcy. This debt fills the gap between senior lenders, like banks, and equity investors.

Real Estate Loans

Loans on new properties-which are short term construction loans-or on existing, improved properties. The latter typically involves buildings, retail and multi-family complexes that are at least 2 years old and 85% leased.

Sales/Leaseback Financing

Selling an asset, such as a building, and leasing it back for a specific period of time. The asset is generally sold at market value.

Start-Up Financing

Loans for businesses at their earliest stage of development.

Working Capital Loan

A short-term loan for buying assets that provides income. Working capital is used to run day-to-day operations, and is defined as current assets minus current liabilities.

It’s always better to get by without taking on debt. But on the other hand, most businesses need to acquire financing at one point or another. A home office is less likely to require financing than a business location that you rent. A one person operation is less likely to need financing than one with employees.

When you do need the financing, remember to examine all avenues of financing open to you and scrutinize the terms of all the proposals.

Why Personal Finance Software Is Important

Why personal finance software is important

These days, technology has really revolutionized people’s way of life, including their financial life. Back in the day, most people used a pen and paper to document their earnings, spending, and finances.

What is personal finance software?

Home finance software refers to a financial tool that enables you to prepare a budget, track your expenses, and check your overall finances. These days, there is no valid reason why you should be disorganized and mired in debt because there are many good personal finance programs that you can use to keep track of your money, plan your future, and completely control your finances. If you have a PC or laptop, you are lucky because you can easily find good home finance software at little cost. Application programmers have now catered for the high demand for these applications as they now come with all sorts of functions and capabilities that can save your money, time and effort.

Analysis

You can now analyze your finances unaided. However, this kind of analysis can be much easier if you have some accounting background. Finance software will analyze your important financial details. Details such as your monthly expenses will stick out. Many personal finance applications also allow personalization. If there is one particular aspect you want to know about your finances, you can simply create a specialized analysis. Many personal finance programs can also give you a monthly analysis-an excellent way to see how you actually spend your money on a monthly basis.

Budget creation

We all know the importance of a personal budget. But creating a real budget that you’ll stick to is easier said than done. You can find a personal finance application that creates a realistic budget for you. Simply enter your basic information into the software and quickly create a simple budget.

Checkbook balances and bill payments

Sometimes you’ll fail to pay bills on time. When it happens, interest rates are more than likely to shoot up. Fortunately, you can avoid this mistake once and for all. Look for a personal finance application that’ll remind you when to pay your bills. Likewise, you can accomplish balancing your checkbook by just ticking a box. Sum up any amounts withdrawn from your account and check carefully anything that seems suspicious. Once you have everything on record, it becomes much easier to know how your finances are faring.

Trust yourself and no one else

When it comes to finances, it is best to keep track of all you have carefully. You may trust your finances with your financial adviser, but it is still important to know where every cent is at, always. With a personal finance application, your money will never be far away from you. Whether you are paying bills, balancing your checkbook, tracking your paycheck, or creating a personal budget, you should not live without personal finance software.

Equipment Financing Rates Can Come In A Wide Range

Equipment financing rates can vary considerably from one lender or leasing company to another, among different types of assets and geographies as well.

This is largely due to the wide spectrum of financing models that are in the market, and the manner in which each lender or lessor targets the market and prices their funding according to risk.

So while there can be some funder specific criteria that impacts the effective lending rates, there are some basic guidelines that you can follow when trying to assess the type of financing rate you should be paying.

First of all, equipment financing rates will have some dependence on the size of the deal. For instance, on amounts under $200,000, the rate is typically going to be higher than for larger borrowing or leasing amounts.

Second, lower rates tend to be offset by a slower process for application and funding, and a lower financing amount or loan to value. As an example, if you were to get a small business equipment loan through a bank, the lowest potential cost of financing would be prime + 3%. But in order to qualify for that rate, you are going to have to survive a very thorough application process which will require you to have strong credit, and strong personal net worth to guarantee the loan…and the loan to value will not likely be more than 75%.

If you want a higher loan to value then its likely that the rate will also be slightly higher to offset the relative risk of the financing source.

For instance, most leasing companies will provide “A” credit clients with leverage at or near 100% of the asset acquisition cost. But the effective rate on borrowing also tends to be slightly higher than what they may be able to secure at a bank or institutional lender where they still may qualify.

The slightly higher rate from a small ticket leasing company not only can provide higher leverage, but also faster turnaround time as compared to bank financing option.

So as a business owner, there are trade offs to consider in terms of cost, leverage, and timing.

Businesses that have been established for under three years, or have some degree of credit or financial distress will be faced with a higher cost of borrowing as well due to the higher risk of potential loss to any financing company that approves funding.

There can also be equipment leasing rates at or lower than bank rates, but these are typically reserved for companies with very strong credit profiles, or for situations where the equipment manufacturer or dealer have provided the finance company with some type of risk reduction which allows the effective rate offered to the customer to be lower.

Type of equipment can also impact the effective lending rate. The more a piece of equipment is considered to be a commodity with a large and predictable resale market in terms of resale value and time to complete a sale, the less risk that will be associated with that particular asset.

From a geographic and industry point of view, finance companies will also have preferences with respect to their lending and funding criteria, providing better rates for locations and industries that best fit those criteria.

The main main takeaway here is that it is not always obvious as to what the best financing option is for a given situation until all the relevant factors are considered.

By thinking in terms of what the sources of equipment financing in your area are looking for will provide a better guideline as to what makes sense for your business for an particular financing request, at any given point in time.