Different Sources of Business Finance With Example

Every business requires capital for growth. Due to this reason, organizations need to utilize one or more sources of business finance so that they can grow positively with time.

In this article on different sources of business finance, we will be exploring these sources with examples and their requirement.

Table of Contents

• What is business finance?
• Sources of business finance
• Why do we need different sources of business finance?

What is Business Finance?

Business finance is the field that deals with the financial decisions of a business. It involves the management of the company’s money and financial planning to ensure that business operations are running smoothly and it remains sustainable in the long run. Business owners often face the challenge of securing funding for growth. Whether you are trying to expand your operations or investing in assets; finding the right source of finance is important.

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Traditional Sources of Business Finance

The following are the main sources of business finance:

1. Sources of Business Finance: Bank Loans

Bank loans are a common source of business finance. They offer a lump sum of money that is repaid with an interest over a fixed time period. A bank loan refers to a financial arrangement in which either a bank or financial institution lends a specific amount of money to an individual, business, or organization. It is a form of debt financing commonly used by borrowers to meet their financial needs, such as funding business operations, investing purchasing assets, or addressing personal financial requirements.

Eligibility and Application: To qualify, businesses typically need a very strong credit history and a solid business plan. The application process involves submitting financial statements and undergoing a credit check.

Pros and Cons: Bank loans offer predictable monthly payments that can be used for a wide range of business purposes. However, they require collateral and have strict eligibility requirements.

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How bank loans help businesses in growth? 

Starbucks, the global coffee empire, utilized bank loans as part of its growth strategy. 

• Early Expansion: In the early years of Starbucks, when it was primarily focused on expanding its presence within the United States, the company relied on bank loans to secure the necessary capital for opening new stores and supporting its operations. Bank loans provided the financial resources required to lease or purchase real estate, acquire equipment, and hire employees.
• Working Capital: As Starbucks continued to grow and establish a strong presence in the coffee market, bank loans played a significant role in providing working capital to fund day-to-day operations. These loans helped cover operational expenses, inventory management, and cash flow needs during periods of growth.
• Acquisitions: Starbucks has also pursued growth through strategic acquisitions of other companies in the coffee and related industries. Acquiring existing businesses often requires substantial capital, and bank loans can be a source of funding for such acquisitions. Bank loans might be utilized by Starbucks to finance acquisitions, enabling the company to expand its product offerings, enter new markets, or diversify its business.
• International Expansion: As Starbucks embarked on its global expansion strategy, bank loans played a crucial role in financing the establishment of new stores in various countries. Opening stores in international markets often involves significant upfront costs, including real estate investments, store build-outs, and operational expenses. Bank loans provided the necessary funds to support Starbucks’ international growth plans.

2. Sources of Business Finance: Business Credit Cards

Business credit cards are designed for businesses, offering financial tools and benefits tailored to meet the needs of business owners and their organizations. By using a dedicated business credit card, business owners can easily track and manage their business-related transactions. This makes accounting and expense tracking more efficient. The higher limit enables businesses to make larger purchases or cover significant expenses related to operations, travel, or equipment.

Eligibility and Application: For getting a business credit card, good personal credit is required. Application is typically online and approval can be instant.

Pros and Cons: Business finance credit cards offer a convenient way for making purchases, pay bills, and manage expenses. They can be used for various business-related expenses, such as office supplies, travel expenses, and online purchases, making them highly versatile.

How it help businesses in growth? 

Business credit cards have played a significant role in supporting the growth of many businesses. Here are some ways in which business credit cards have been beneficial for actual businesses:

• Managing Cash Flow: Business credit cards provide a flexible source of funds that can be used to manage cash flow fluctuations. They allow businesses to cover immediate expenses while awaiting payment from customers or during slower sales periods. By bridging the gap between cash inflows and outflows, credit cards help businesses maintain their operations and continue their growth trajectory.
• Funding Business Expansion: Business credit cards can serve as a convenient and accessible source of capital for small-scale business owners looking to expand their operations. Credit cards can provide the necessary funding in a timely manner. This is helpful for those businesses that are not qualified for traditional bank loans due to limited credit history or collateral.
• Purchasing Power and Discounts: Business credit cards often come with higher credit limits compared to personal credit cards. This increased purchasing power enables businesses to take advantage of bulk purchasing discounts or negotiate better terms with suppliers. By leveraging their credit card’s available credit, businesses can access volume discounts, which can contribute to cost savings and improve profit margins.
• Building Business Credit: Establishing and maintaining a positive credit history is essential for businesses looking to secure future financing or larger credit lines. Business credit cards provide an opportunity to build and strengthen the credit profile of a business. Consistently using the card responsibly, making timely payments, and keeping credit utilization in check can help improve the business’s creditworthiness, making it easier to qualify for loans or other types of financing in the future.
• Streamlining Expense Tracking and Reporting: Business credit cards offer detailed monthly statements that categorize expenses, simplifying expense tracking and reporting processes. This saves businesses time and efforts in managing their finances and allows them to monitor spending patterns, identify cost-saving opportunities, and streamline accounting processes. 
• Rewards and Benefits: Many business credit cards come with rewards programs tailored to business needs. These rewards can include cashback, airline miles, hotel discounts, or access to exclusive perks like airport lounge access or concierge services. By leveraging these rewards, businesses can save money on routine expenses, reduce travel costs, or reinvest the rewards into their growth initiatives.

3. Sources of Business Finance: Crowdfunding

Crowdfunding is a fundraising method for projects, ventures, or by collecting small contributions from individuals via online platforms. These platforms allow businesses to raise small amounts of money from large pool of people. It helps in gaining capital and engaging communities in supporting various initiatives. Crowdfunding attracts backers from different geographical locations and backgrounds who are passionate about the project or have personal connections to a cause.

Pros and Cons: Crowdfunding can also serve as a marketing tool, creating buzz around your product or service. However, it requires a compelling story and significant marketing effort. By leveraging crowdfunding, project creators can get access to a diverse pool of potential investors or contributors. This helps in reducing dependence on a single source of funding and spreads the financial risk. 

How do businesses grow with the help of crowdfunding?

Oculus Rift, a virtual reality headset, raised $2.4 million on Kickstarter before being acquired by Facebook. The company gained significant attention and support through crowdfunding:

• Initial Funding: Oculus Rift was first introduced to the public through a Kickstarter crowdfunding campaign in 2012. The campaign aimed to raise funds to develop the prototype of the VR headset. The response was overwhelming, with the campaign surpassing its funding goal of $250,000 within hours and ultimately raising over $2.4 million. This initial crowdfunding success provided Oculus Rift with the necessary capital to kickstart its development process.
• Market Validation: The Kickstarter campaign not only provided funding but also served as a validation mechanism for the concept of VR gaming. The enthusiastic response from backers demonstrated the strong interest and demand for immersive virtual reality experiences. This market validation helped Oculus Rift gain credibility and attract further attention from investors and industry professionals.
• Community Engagement: The Kickstarter campaign allowed Oculus Rift to build an engaged community of early supporters. Backers became advocates for the project, spreading the word about the innovative VR technology and generating buzz through social media and online communities. This grassroots support and word-of-mouth marketing were instrumental in creating awareness and generating excitement for the product.
• Industry Attention and Partnerships: The success of the crowdfunding campaign drew the attention of industry experts, developers, and potential partners. Oculus Rift’s innovative VR technology and the strong backing from the crowdfunding community attracted the interest of gaming and technology companies. This led to partnerships, collaborations, and investments, helping Oculus Rift expand its reach and accelerate its growth.
• Investment Opportunities: The success of the Kickstarter campaign provided Oculus Rift with a solid foundation to attract further investments. The attention generated from crowdfunding campaigns often serves as a catalyst for venture capital firms and larger investors to get involved. The positive reception and market potential demonstrated through crowdfunding helped Oculus Rift secure additional funding, enabling the company to further develop and refine its VR technology.
• Acquisition: The momentum generated by the crowdfunding campaign and subsequent investments led Oculus Rift to catch the attention of Facebook. In 2014, Facebook acquired Oculus VR, the company behind Oculus Rift, for approximately $2 billion. This acquisition provided Oculus Rift with the resources, expertise, and infrastructure necessary to continue its growth and expand its VR ecosystem on a larger scale.

4. Sources of Business Finance: Invoice Factoring

Invoice factoring is a financial arrangement where a business sells its accounts receivable to a third-party financial company, known as a factor, at a discount. The factor then advances a percentage of the invoice value to the business, providing immediate cash flow, while assuming the responsibility of collecting the payments from the customers.

Pros and Cons: Invoice factoring is a flexible financing option that can scale with the growth of a business. As the volume of invoices increases, the available funding from the factor also increases, providing businesses with the necessary working capital to support their expansion. Factors may have criteria for the types of invoices they will purchase, which means not all invoices may be eligible for factoring. This selectiveness can limit the amount of working capital that businesses can access through factoring, potentially leaving some invoices without immediate funding.

Eligibility and Application: Businesses with unpaid invoices from reliable customers are eligible. The application process involves submitting invoices and customer details.

How have businesses grown with invoice factoring?

Invoice factoring enables businesses to improve cash flow, secure working capital, mitigate credit risk, and focus on their core competencies. By accessing immediate funds and outsourcing collections, businesses can fuel their growth initiatives, expand their operations, and capitalize on market opportunities, ultimately driving their long-term success. 

• Improved Cash Flow: Invoice factoring provides businesses with immediate access to cash by converting their accounts receivable into working capital. This improved cash flow allows businesses to cover day-to-day expenses, invest in growth opportunities, and seize time-sensitive opportunities that require immediate funding. With a steady cash flow, businesses can fuel their operations and drive growth.
• Working Capital for Expansion: Invoice factoring enables businesses to secure the working capital needed to support expansion initiatives. Whether it is expanding into new markets, increasing production capacity, or launching new product lines, having access to cash through factoring helps businesses execute their growth strategies without relying solely on internal funds or incurring debt.
• Opportunity to Offer Credit Terms: By utilizing invoice factoring, businesses can offer credit terms to their customers, allowing them to make purchases on credit and pay at a later date. This can be a competitive advantage, attracting more customers and boosting sales. Rather than waiting for customers to pay, businesses can receive immediate cash through factoring, allowing them to continue operations and invest in growth while their customers take advantage of credit terms.
• Focus on Core Competencies: Outsourcing accounts receivable management to a factor allows businesses to focus on their core competencies and strategic initiatives. Instead of spending time and resources on collections and chasing payments, businesses can redirect their efforts towards sales, marketing, product development, and other activities that directly contribute to growth.
• Credit Risk Mitigation: Invoice factoring helps businesses mitigate the risk of non-payment or late payment by transferring the credit risk to the factor. Factors conduct credit assessments of customers before purchasing the invoices, reducing the likelihood of default. This allows businesses to safeguard their cash flow and minimize the impact of bad debts, enabling them to confidently pursue growth opportunities.
• Scalability: Invoice factoring provides businesses with a flexible financing option that can scale with their growth. As sales and accounts receivable increase, the available funding through factoring also grows. This scalability allows businesses to access the working capital needed to support their expanding operations, invest in new ventures, and capitalize on market opportunities.

Need for Different Sources of Business Finance

The following reasons indicate the need for different sources of business finance:

1. Risk Mitigation

By diversifying funding sources, businesses can mitigate the risk of relying solely on one source of finance. However, if the business also has access to alternative sources such as angel investors or crowdfunding, it can still obtain the funding it needs to sustain operations and pursue growth.

Example: If a business solely relies on bank loans for funding and the bank tightens its lending criteria or faces financial difficulties, the business may struggle to secure the necessary capital. 

2. Scalability and Growth

Different sources of finance cater to different stages of a business’s growth. By utilizing various sources of finance at different stages, businesses can align their funding with their growth trajectory and maximize their chances of success.
Example: A notable example is the ride-hailing service Uber, which started with angel investor funding and later secured significant venture capital investments to fuel its rapid expansion.

3. Industry-Specific Financing

Industries may have specialized financing options that are more tailored to their needs. Government grants or subsidies may be available for businesses operating in specific sectors such as renewable energy or research and development. By exploring industry-specific financing sources, businesses can leverage opportunities that are unique to their sector and maximize their financial support.

Example: In the real estate industry, businesses often rely on mortgage financing to acquire properties and construction loans to fund development projects. 

4. Cash Flow Management

Sources of finance offer varying terms and repayment structures, allowing businesses to manage their cash flow better. Alternatively, a business with a stable cash flow may choose to establish a line of credit to address short-term working capital needs or manage unexpected expenses. By having multiple sources of finance, businesses can optimize their cash flow management strategies and maintain stability during different business cycles.

Example: For example, a manufacturing company that experiences seasonal fluctuations in revenue may utilize invoice factoring to improve cash flow during periods of low sales. 

5. Investor and Lender Preferences

Investors and lenders have diverse preferences when it comes to financing certain business ventures. Some investors may be more inclined to invest in early-stage startups, while others may focus on specific industries or geographic regions. By approaching different investors and lenders, businesses can tap into a broader range of financing opportunities and find partners who align with their vision and goals. 

Example: Beyond Meat, a plant-based meat alternative company, successfully secured investments from various venture capital firms, strategic partners, and even high-profile individuals like Bill Gates and Leonardo DiCaprio, allowing them to drive innovation and expand their market presence.