Business Finance: Definition, Origins, and Categories

Within corporations, business financing is no less than the lifeblood of all the tasks happening within a business. Be it an investment from stakeholders, a business loan, or even an instant business loans, financing happens in many ways.

Without proper management of finances, any business struggles to survive. And as a result, it might fall behind in the competitive market. So, it is important to smartly manage the cash flow of your business.

Let’s take a deeper insight into business financing and some common ways to finance your business.

Definition of Business Finance

Simply stated, business finance is the management of all the financial assets of a company. It includes a number of activities, like gathering, distributing, and usage of funds. The main purpose of business finance is to effectively utilize the investment acquired from shareholders. To effectively manage the resources, you must make strategic use of investments, along with managing working capital and capital structure.

When you successfully manage your business’s finances, you will be able to effectively use the available investment. Moreover, you will also be able to optimize your existing finances. But you must remember that it takes planning, decision-making, and data analysis to make correct decisions for sustainable growth.

Origins of Business Finance

Business financing is as old as the business itself. In fact, its origins can be traced back to earlier civilizations, where trade and barter systems were still in use. However, it became more formal in the Renaissance period in Europe. This period is also marked as a time for significant economic and financial improvements.

During this period, the basics of the modern banking system were put in place. With the rise of the banking system, stock exchange, and growth of accounting practices, this time was crucial for banking.

The Industrial Revolution in the 18th and 19th centuries pushed the concept of business financing ahead into practice. As the industries expanded, the need for large investments became more noticeable. This resulted in the creation of new financial tools and institutions. 

Categories of Business Finance

Business financing has three types: asset management, long-term finance, and short-term finance. All the categories have a specific purpose. So, all of them contribute to the overall financial health of a business in different ways.

1. Asset Management

Asset management is also known as working capital management. It mostly involves the management of a company's current assets. It also manages the liabilities to maintain the quality of decisions. The purpose of business finance is to improve cash flow.

Key components of asset management are:

Cash Management

It makes sure that the company has enough cash to meet its short-term expenses while minimizing untouched cash balances.

Inventory Management

Maintaining proper inventory levels to meet customer demand without using up excessive capital.

Payables Management

Managing the payment schedule for suppliers and maintaining good relations with them.

2. Long-term Finance

Long-term financing undertakes the management of a company's long-term investments and capital structure. It majorly funds large capital expenses, like funding expansion projects and buying assets. Such financing is important for a company’s growth as it allows for smart investments that give long-lasting results.

Common sources of long-term finance are:

Equity Financing

Equity financing refers to the rise in the capital of a company by issuing its shares to the investors. 

Debt Financing 

Raising capital through long-term loans or by issuing bonds. This makes the company accountable for repaying the borrowed amount with interest.

Retained Earnings

Instead of distributing them to shareholders as dividends, funding the company's long-term investments from its total profits to finance long-term investments

Venture capital

Investors for equity, provide funding to startups and small businesses with high growth potential.

3. Short-term Finance

Short-term financing mostly undertakes the management of a company's financial benefits and disadvantages. The main purpose of short-term financing is to make sure that a business has enough liquidity to easily meet its current needs. 

Common sources of short-term financing are:

Trade Credit

A trade credit is an arrangement where suppliers allow businesses to buy goods and services on credit that they shall pay later.

Bank Overdrafts

This facility is only provided by banks. This allows businesses to withdraw more money than is available in their account but only up to an agreed limit.

Short-term Loans

Also called instant business, these loans with a repayment period of less than one year. They are mostly loans used to finance unexpected business expenses.

Conclusion

For any business, business financing is important as it helps you get lasting growth. By understanding its definition, origin, and types, you can make smarter financial decisions for your business. From short-term financial management to long-term investment planning, you can plan all of it easily. As a result, you can easily achieve financial stability.