1- Nature and significance of business finance
Business finance can be used at different stages of the development of a business. First of all one must use finance to raise the sum of money required to start a business i.e. theinitial capital. The amount of funds required depends upon the nature and size of the business. Finance is also required to operate the business. To meet the day-to-day needs of the business, its managers cannot do without finance. They will as well need finance for the modernization of the business.
Finance is very important for the survival of a business. Indeed allbusinesses share the need of finance to acquire fixed assets including machinery, furniture and find short terms working capital to run their activities. Availability of finance is thus essential to the daily activities as well as for investment in durable assets. Yet, the importance of the finance does not end with the launching of the business. Additional investments are needed to proceed toexpansion, modernization and increasing competition. Adoption of new methods of production or distribution or plant and machinery to be modernized, or new products in the market require heavy expenses. Finance is needed at every moment in the life of a business. It must be available at the proper time and sufficient. Finance plays such a vital role in modern enterprise that it’s often said to be thelifeblood of business.
2- Sources of business finance
The financial resources of a business may be provided by owners’ funds or borrowed funds.
2.1 Owners funds
Owners’ funds are the amounts contributed by owners including the profits reinvested in the business. Owner's fund has four main characteristics: First of all it provides risk capital. It is the owners that bear the risks of lossesor low profits by providing their own money. It forms the basis of raising loans. The ownership capital is secondly a permanent source of capital. It remains permanently invested in the business and is available for all purposes throughout its life. A third characteristic of ownership capital is that it helps owners to acquire their right of control and supervision over management though theresponsibility does not stay with them. Finally no security is to be offered against ownership capital.
2.2 Borrowed funds
Loans and credits can also meet the financial requirements of business firms. They are provided by both banks and financial institutions and sock market. If borrowing money is necessary for a business, it is also expensive and needs a lot of formalities. Contrary to owners’funds, borrowed funds need guarantees such as mortgages
3- The Financial institutions and their functions
There are several types of banks according to their roles and services they provide.
- Central banks
Central banks are the only banks to be allowed to issue banknotes. Their main function is to apply the country’s monetary policy. A central bank is the Government’s banker:When short of money the government may borrow from the Bank. It is in charge of the keeping of the country’s reserves. Also called “Bankers’ bank”, the central bank collects the large deposits of other banks that they use to settle accounts among them. A Central bank regulates the flow of capital into and out of the country. It also uses the Bank rate to regulate the amount of credit available a...