What is Business Finance?

In the rapidly changing world of business, finance stands as the lifeblood of any successful venture. Whether you are a prosperous entrepreneur or just beginning to embark on your business journey, mastering the intricacies of business finance is crucial for long-term sustainability and growth.

However, there are a number of challenges that can appear along the way in your business journey. Simply Business’ 2023 Insight report found that 44% of SME business owners claim the rising costs of running a business have become a real challenge. Therefore, understanding business finance and how to utilise it properly, can equip you with the tools and knowledge to make those important financial decisions for a thriving business.

In this article, we will cover:

• What is business finance?
• Different types of business finance
• Sources of business finance
• How to maximise your chances of securing business finance

What is business finance?

Business finance refers to the management of funds of your organisation. This covers a range of operations; from analysing your business plans, cash flow, and budget, to profit and loss statements, balance sheets, and calculation of collateral. Depending on the size of your business, you may even have a financial accounting team that looks after this.

By staying on top of your business finances, you are able to:

• Achieve business milestones, such as expanding your company
• Measure business performance, identifying areas for improvement
• Make well-informed decisions about your spending
• Keep up-to-date on tax payments
• Review your working capital

Learn more in our article on Financial Terms Business Owners Need to Know

Different types of business finance

There are wide-ranging funding options available to meet the demands of companies seeking to take advantage of business finance. Depending on your organisation, the options can help you make a financial strategy to align with your business objectives.

The different types of business finance are:

Business credit cards

Using a business credit card, rather than a personal one, can help you build a credit profile to improve any funding opportunities in the future. They are also a great way to track expenses for bookkeeping and tax purposes.

Business overdraft

Overdrafts on a business bank account can grant you short-term cash flow. Although a business loan can come with its own fixed repayments and interest rates, a business overdraft will only charge interest on the amount that you are overdrawing.

Invoice financing

Invoice financing is a financial arrangement where a business sells its outstanding invoices or accounts receivable to a third-party financial lender. In exchange for the invoices, the business will receive an immediate cash payment.

Trade credit

Trade credit is a financial agreement between the business and the customer, allowing them to purchase the goods or services of the company without immediate payment. It is usually agreed within a later scheduled date through an invoice.

Asset finance

Asset finance is a financing option that helps businesses grow by acquiring assets that benefit the function of their industry, such as using modern equipment and plant machinery. It is paid over a certain time period to help the company’s financing options, whilst also acquiring the asset sufficiently.

Lease financing

Lease financing helps businesses who do not have available upfront finance to gain funding for assets, such as necessary equipment, to improve their organisation. The lender will buy the asset and lease it to the business owner, who will make regular payments to the lender over a length of time.

Hire purchase

If you choose a hire purchase, you would pay a deposit with monthly instalments over a period of time before owning the asset. For example, buying a company vehicle.

Short-term business loans

Typically a loan that lasts for less than three years, a short-term business loan allows you to gain finance for any business opportunities, or cover costs you need to pay.

Long-term business loans

Having a long-term business loan allows companies to borrow money over a longer period of time. Long-term business loan repayments often have low-interest rates and more manageable payments as it is extended over a specific time frame.

Small business grants

In order to help small businesses thrive, these grants are money that is provided by the government that does not need to be paid back.

Government loan schemes

The UK government provide loan schemes for businesses at preferential rates for small businesses. 

For example, the Recovery Loan Scheme or RLS is a UK government scheme. The RLS is in Phase 3, which expands on the previous phase by removing several eligibility restrictions.

Sources of finance for businesses

When you are starting up your business, you may require raising finance to fuel your company’s growth. You may already have the majority of your finances secured, but having short-term loans can help launch your business quicker.

Securing finance for your business can be achieved through:

Asset financing and leasing

Using asset finance is a flexible funding solution in order for businesses to access the necessary equipment to help with their company growth. Equipment leasing is a common example of asset finance. For example, if you worked in the agricultural industry and required new combined harvesting equipment, you would pay the lender an agreed amount over a certain time period, allowing you to swiftly gain access to the machinery.

Bank loans

Bank loans are a popular form of financial access. If you were to acquire funding from a bank, you would receive a specific amount of money from the institution, with an agreed repayment schedule and additional interest over time. Although a bank loan can be a valuable source of funding, it is worth noting that organisations have different terms and conditions.

Business angels

Business angels or business investors are often experienced entrepreneurs or professionals with a keen interest in investing and mentoring small businesses and startups. However, it is important to remember that you are partly giving away your business control, allowing someone else to take part ownership.

Crowdfunding

Crowdfunding is used as a method of raising capital for businesses through small contributions from the general public. This is usually achieved through online platforms such as JustGiving and GoFundMe. Raising finance through crowdfunding reaches a wide audience of potential backers who are willing to provide financial support to your business idea.

Family and friends

Approaching a family relative or even friends for a loan comes with its benefits and drawbacks. On the one hand, it is a very flexible option; they may offer you a loan without interest rates and do not require as much security as a bank would.

However, the disadvantages can lead to a damaged relationship between you and your lender. There is a possibility that your business is unable to achieve high profitability, so the responsibility of losing their money is a serious risk.

Government-backed schemes

A government-backed scheme is an initiative supported or partially funded by a government to achieve a business objective. These can be obtained through financial assistance, grants, loans, tax incentives and training programmes.

Local authorities

Local authority funding refers to financial resources and revenue that local governments receive to support public services within a specific geographical area, such as a county or region. Funding can be secured through government grants, local taxation, and revenue sharing.

Venture capitalist (VC’s)

A venture capitalist is a professional investor who can provide financial capital to early-stage businesses and companies looking to grow, in exchange for equity ownership in those companies. Although their expertise can help companies grow and succeed, the purpose of VCs is for them to receive significant returns on their business investments.

How to maximise your chances of securing business finance

There are many ways you can improve your chances of securing business finance in order to expand your business and obtain funding for company growth.

You can maximise your eligibility by:

• Knowing which funding options are right for your business
• Attaining quality financial information about your company, having all the updated facts and figures to hand. In doing so, you are equipped with knowledge of your business’s financial situation
• Having a clear business plan
• Producing long-term forecasts of your cash flow
• Improving your business credit score

We can help you secure finance for your business

The finance market can be overwhelming and extremely competitive. At Union Business Finance, we provide efficient and effective business financing solutions to help your organisation succeed.

With more than ten years of experience, we pride ourselves on:

• Transparency
• Ethics and integrity
• Building personable, long-lasting relationships

For more help and information on your business finance options, call us today.