Finance Strategies for Business Enterprises
In order to maintain the stability of their business enterprises, business leaders must have an effective strategy for financing. In general, strategies for financing can be divided into three categories: internal finance, external finance, and equity finance. Each financing strategy has its own advantages and disadvantages which must be weighed in order for the business to achieve the best strategy for their situation.
Internal finance involves using the company’s own funds, as opposed to external finance which is using outside sources of funding. Internal finance is typically the most attractive form of financing because of its low cost and lack of strings attached. The company is not required to pay interest or fees on the funds; instead, the funds are treated as a part of the current assets of the company. For larger business enterprises, this can be a viable source of financing; however, there is a limited amount of funds in the company’s reserves and these reserves may need to be used in other areas of the business.
External finance involves obtaining funding from outside sources such as banks, venture capitalists, and other lenders. This type of financing is often necessary when a business needs to expand or needs an immediate influx of cash. While the terms and conditions of obtaining external finance are more rigid, it can often be less expensive than taking out a loan from a bank. This type of financing is also more readily available than internal finance and does not have the same risk associated with it.
Equity finance refers to the sale of shares in the company to investors. This type of financing is often used when a business requires funds for expansion. By selling equity in the business, the business is able to raise funds with minimal debt. However, equity finance also comes with certain risks as the company is now responsible for the maintenance and performance of the shares it has sold. Additionally, the company is also forced to adhere to certain regulations and requirements imposed by the stock exchange.
Business enterprises are often faced with a trade-off between cost, availability of funds and risk when utilizing various financing strategies. Therefore, a comprehensive approach to financing should be undertaken when deciding on a strategy. For example, if external finance is not available or is too costly, the business might consider utilizing equity financing in order to obtain the necessary funds. Additionally, the business should consider how the financing strategy will affect the performance of the business in the long run.
While there is no one-size-fits-all financing strategy for business enterprises, devising a comprehensive financing strategy is essential to the successful operation of any business enterprise. By understanding the advantages and disadvantages of the different financing strategies, businesses can utilize the most suitable option for their specific needs. This will help ensure the company’s financial stability and allow the company to reach its maximum potential.
