Business Funding: Types, Sources and Management

Business Funding

A business needs capital or money to start, operate, and grow the business, the need of money in business at various stages is called business funding. Proper arrangement of money and management of that funds is very important for running business activities. It is almost impossible to running a business without funds, and proper fundraising and utilization of funds determines the success of the business.

Main focus of this article is: the types, sources, and management of business funds.

Types of Business Funds

Business funds are generally of two types: 1) Short-term Funds, 2) Long-term Funds

1. 1. Short term funds
      Generally, short-term funds are used for running the day-to-day operations of a business. These types of funds are utilized as a part of the business’s operating capital and are often repayable in a year. Example: Purchase of raw materials, payment of salaries, payment of electricity bills etc. all running expenses are in short term category.

2. 2. Long term funds
      Long-term funds are used to invest in capital projects of the business. This type of fund is usually used for a period of five years or more and is spent on fixed assets of the business. Examples: Buying land, setting up factories, buying machinery, and expanding business.

Sources of Business Funding

Sources of business funding can be of various types and they generally depend on the size, type, and status of the business. There are mainly two sources of funding: internal sources and external sources.

1. Internal Sources
Raising money from internal sources means using the internal resources of the business. Through this, funds are raised from the income and assets of the business. It is managed without fresh funding, so the risk of such funds is low. .

        i) Business Profits: Money saved from the profits of the organization is reinvested.

        ii) Sale of Surplus Assets: Funds are raised by selling redundant assets of the business.

        iii) Depreciation: Depreciation of business assets such as machinery or vehicles frees up some funds which are reinvested.

2. External Sources
Funding from external sources means raising money from outside the business. It consists of different sources which are used according to business needs.

        i) Loans: Businesses are invested with loans from banks or financial institutions. This loan can be short term or long term.
        ii) Share issue: Businesses can raise money from investors by issuing new shares.
        iii) Venture Capital: Funds are raised from venture capital firms for new or innovative businesses. It is usually invested in high risk but high potential businesses.
        iv) Angel Investment: Private investors or angel investors provide funding to new or small businesses.
        v) Government Grants and Incentives: Funding is provided to businesses through various government schemes. Governments often provide incentives and grants, especially for small and medium-sized businesses.

Business Fund Management

Proper fund management is a major way to ensure business success. There are some important strategies to follow for proper fund management.

        1) Determination of Funding Requirements: First, the business needs to accurately determine the sector in which funds are needed. Failure to determine the right amount and sector of funds may lead to wastage or inadequacy of funds.

        2) Selection of source of funds: The right source should be selected according to the funding requirement. Internal sources are risk-free but may be limited, while raising funds from external sources is risky but can provide large amounts of funding.

        3) Plan expenditure of funds: It is very important to make a clear spending plan before every investment. Determining in advance how money will be spent on which sector ensures proper utilization of funds.

        4) Redeployment of funds: After earning a profit a certain portion from that profit should be reinvested in the business. It helps in business development and expansion.

        5) Risk management: With any investment there is risk, so be aware of the risk while managing funds. Risk analysis and countermeasures should be developed.

 Business funding is the key driver of business success. Proper fund raising and management makes business profitable and sustainable. Businesses can reach new heights by raising funds from internal and external sources, but successful fund management requires clear planning and strategy.

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