Business finance is often seen as the most abstract and complicated area of financial management. Indeed, it is true that the various theories and concepts behind business finance are incredibly diverse, ranging from micro to macro economic concepts. Nevertheless, business finance is an essential part of any institution’s success. In simple terms, business finance is the study and control of monies and financial investments. While it does not encompass all financial planning, it does play an important role in it. The study of business finance starts with the establishment of a company.
Starting a business requires large sums of money, which in turn requires the institution of a financial structure. A company needs funding for its growth opportunities: for instance, it may need to purchase raw materials to grow its production, or it may need funds to undertake research and development projects to expand its range of offerings. The initial source of funds for these activities will be the profits made by the business during its initial years of operation. Over time, this profit may either diminish or increase, depending on various factors such as government tax policies, external factors such as economic or political developments, as well as subjective factors such as the profitability of the business model, market competition, and the quality of the underlying assets.
Therefore, a company has two options when it comes to looking for new sources of capital. One is to issue debt through loans to individuals (or its own shareholders) or to other companies; the latter option is called business finance. Another option is to issue equity to the public. The most common type of equity financing is secured debt, which is created through issuing commercial mortgage or secure notes (a type of borrowing using property as collateral). The most common form of non-secured business finance is unsecured debt, which is created through issuing stock in a company without using property as collateral.