Financing can be a challenging process. It can be difficult to know what type of financing is right for your business, and it can be difficult to find a lender that is willing to work with your business. That’s why it’s important to have a solid understanding of the concept of financing before you start the process. In this article, we’ll discuss the different types of financing available to businesses, and we’ll provide tips on how to find the best lender for your business.

The concept of financing

If you go to a tailor shop in your area, you will see one or two people sewing clothes on a sewing machine. Again maybe someone is cutting clothes or sewing buttons. As a result, the owner of a tailor’s shop has to purchase the required quantity of sewing machine, yarn, buttons, scissors, etc. to carry out this process properly. 

At the beginning of the business, he usually executes the funds required for these purchases using his own capital. If there is a shortage of funds to meet the expenses, some amount of money can be borrowed from relatives along with one’s own capital. At the end of the month while in business, he pays the expenses required to pay the salaries of the employees, shop rent, electricity bills from the income earned from sewing clothes. 

From this income he also has to plan to repay the loan. A tailor shop owner always has an expectation that there is some profit from the income of the business even after deducting the expenses of the business, with which he can meet the casual expenses of his family and save for the future or use for business expansion. 

So if a tailor shop owner manages the business through a plan to use the source of funds, then he can run the business efficiently and make a profit. Otherwise it will be seen that yarn is needed to sew clothes but the buyer is going back as there is no cash. Or the business has to be shut down because there is no money to replace the old machine and buy a new one. 

Business financing discusses when, for what reasons, how much funding is needed, and where the funding should come from.

There is also an application for financing in the family. Usually, each family has one or more sources of income.

Employment, business, agriculture, self-employment, etc. can be a source of income for the family. Again The daily market expenses, house rent, school salary, payment of various bills, etc. are the daily expenses of the family. Just as income needs to be consistent with expenditure, so does the timing of spending. 

When the required amount is not spent, the school’s salary may be in arrears, and the name may be removed from the school. Determining the source of this fund as planned and its proper use is the financing process for the family. 

In addition to such daily necessities, the family may occasionally have to spend large sums beyond their income. If it is not possible to provide money from a regular source of income for the purchase of a new television or refrigerator at home, this deficit can be filled with long-term loans. 

In that case, it is necessary to make a plan to repay the loan. As a result, the idea of ​​financing helps to determine and manage the source of planned funds for the smooth running of the family.

In the case of a school, the process of financing can also be known. A school is a social institution whose main purpose is not to make a profit, it also has a plan for income-expenditure and fund management. 

Educational institutions usually collect funds from these sources such as student salaries, examination fees, and admission fees. In order to run the class properly, the organization has to meet various expenses with this fund. 

Such as salaries of teachers and staff, payment of rent, payment of electricity bills, various types of renovation expenses, and purchase of computers and furniture. 

As a result, in the context of the school, ensuring proper fund management by considering the different sources and uses of funds for the smooth functioning of the various functions of the institution. 

In the above examples, the tailor shop is a for-profit organization, but the family and school are not-for-profit organizations.

The present topic deals mainly with the financing of for-profit businesses. What is the financing process of a grocer? Grocery stores make a profit by selling products. Again for the sale of goods to him the current cost of purchase of goods, shop rent, electricity bill, employee’s salary, etc is to be performed regularly. 

Sometimes the buyer has to spend a lot to increase the size of the store, purchase a refrigerator, etc. These are his fixed costs. As a result, grocers invest funds in current and fixed assets to run their businesses smoothly. If investment funds cannot be raised from the proceeds of the sale, then he has to raise funds from various sources such as his own funds, friends, purchase of borrowed goods, etc. Again, the large sums of money required to acquire fixed assets can usually be obtained from various commercial banks. 

This reduces the risk of repaying the loan as it has the opportunity to repay in the long run. In the case of a grocer, the current expenditure is managed through the proper use of proceeds of the sale, and some long-term investments, are less risky By borrowing from the source, fund management related to timely repayment of loan installments is the main function of business financing.

Square Pharmaceuticals, Bata Company, Kohinoor Chemicals These are large-scale trading companies called companies. The financing process of such an organization is not as simple as that of a grocery store or a tailor’s shop but is relatively complex. A company receives a few different types of benefits from small organizations when it comes to raising funds. Such a company raises its required funds mainly through the sale of shares. 

The reputation of the organization, rate of profit, customer service, or consumer satisfaction helps to increase prices. Discusses and provides guidance on which sources, when, how much funds should be raised from which sources, and how much can be spent or invested in which sectors to increase profits, and business financing.

Classification of financing

The financing process is as important for a business as it is for a non-business. Each organization is involved in an individual financing process. This process takes different forms in different organizations. This time we will discuss such a classification of financing.

Although the main topic of our blog is business financing, here we will also get a brief idea of the financing process of some other organizations.

A) Family financing

In the case of family financing, it determines the source and amount of income of the family, and how that income is spent determines the overall well-being of the family members. The more important expenses are met on a priority basis among the myriad expenses of the family. If the family income is spent money is not enough but can be borrowed from various relatives, acquaintances, and friends. 

Regular expenses are determined in line with regular income. Fixed assets such as TV, fridge, car, and money required for house construction can be borrowed from the bank. But the funds raised are limited and need to be used properly. If the funds raised by the family are more than the required expenditure, it is saved for future use.

B) Government funding

Every government has money management. In the context of a government, the amount of its annual expenditure in which sectors and from which sources that money can be collected is discussed with government funding. The government has to spend money in many sectors for the overall development of the country, such as roads, bridges, government educational institutions, government hospitals, law and order and defense, social infrastructure, etc.

To meet these expenses, the government has to raise money from various sources, such as: income tax, value-added tax, gift tax, import duty, export duty, savings certificates, prize bonds, treasury bills, etc. Funds are raised accordingly by first determining the amount of expenditure on government funding. The main goal of government funding is social welfare. Government funding is usually unprofitable.

Expenditure on government funding may exceed income. There are a number of government-owned businesses that may be relatively unprofitable. Such as: chemical industry establishments under BCIC. Again, big projects like Bangabandhu Bridge require a lot of money to implement, if the government the budget has to be fully funded. Many times the government’s social and state security spending can lead to a financial crisis. As a result, the government often borrows from various sources. Such as: ADB (Asian Development Bank), World Bank, Finance and Business Finance IDB (Islamic Development Bank), etc. 

However, when providing loans, these institutions offer various conditions, which may not be consistent with the development and preservation of the image of the country. Considering this situation, the government wants to raise funds from other sources. At present, large-scale projects are being funded all over the world and in our country through public and private partnerships. This type of financing project is called PPP (Public-Private Partnership)

C) International financing

Imports and exports are judged and analyzed with international funding. Bangladesh is mainly an import-dependent country. Every year a huge quantity of food items, raw materials, machineries, medicines, petroleum etc. are imported from different countries. On the other hand, jute and jute products from Bangladesh readymade garments, agricultural products etc. are being exported. Due to the need to increase imports from exports, there is a huge trade deficit every year. 

Remittances from expatriate Bangladeshis play a special role in filling this gap. Discussion on import and export sectors with international funding is done and how the deficit can be managed.

D) Finance of non-business organization

There are some organizations in society that are engaged in human welfare or in the service of poor and deprived people. To run such an organization requires money or equivalent products or services and also efficient management of that money. The role of financing in this case is to identify the source of wealth and the equivalent of money resources and to achieve its service purpose through its proper use. 

For example, an orphanage is not a for-profit organization. But it also needs money. They raise money through various grants. The money collected is spent on various development of orphans. As a result, the main purpose of non-business organization financing is to identify the source of money of the non-business organization and ensure its proper use in achieving the objectives.

E) Business financing

The most important type of financing is business finance. An organization consisting of profit and loss risk for the purpose of making a profit is called a business organization. As a result, business financing is the financing process that businesses use to raise and invest their funds.

Trading companies are divided into 3 categories: monopoly business, partnership business, and joint venture business. The common feature of financing these three types of organizations is fundraising and money management for investments. Used as a source of capital and debt to raise money.

The most popular business in Bangladesh is usually a small company, which is formed as a sole proprietorship or partnership business. Various small and cottage industries, hotels and restaurants in villages, grocery stores, saloons, boutique shops, etc. are such business establishments. In a sole proprietorship, the owner suffers alone if there is a profit, and the owner’s personal property is used to compensate for losses.

As the risk is distributed among the partners in the partnership organization, the business has to be prepared to use the private property to bear the financial loss. The source of raising funds in such sole proprietorship or partnership business is the owner’s own funds, profits, loans taken from relatives, loans from banks, or rural moneylenders on an interest basis. Therefore, the main purpose of financing such organizations is to make a profit by allocating their own funds and ensuring their proper use.

The financing process of a joint venture company is different. If an organization is to be a joint venture, it has to get government approval. Before approving the government, the minimum amount of capital is analyzed by the directors’ credentials, business objectives, and various documents. A company if approved it sells its large amount of desired capital as shares by dividing it into smaller sums.

For example, a capital of Tk 10 crore is divided into 1 lakh shares of Tk 1,000 and sold to the general public. With only Rs 1,000 per share, small investors in remote areas of the country can also buy the company’s shares. The shareholders own the company and the shareholders of the company can convert the shares into cash by selling the shares in the stock market such as Dhaka Stock Exchange and Chittagong Stock Exchange. By selling bonds and debentures without shares, the joint venture business can raise funds through loans from the general public. 

In the case of the debenture holder i.e. those who purchase debentures or debentures, have to pay interest regularly at a fixed rate. Because they do not own the company like the shareholders.

F) Banks and financial institution

The economic activities of any country usually revolve around the banks and other financial institutions of that country. Public and private commercial banks such as Sonali Bank, Janata Bank, Rupali Bank, Prime Bank, Shahjalal Islami Bank are for-profit businesses, but their financing process is usually a little different from that of businesses. These banks create small-term deposits by collecting people’s small funds and pay interest to the depositors at a fixed rate. Again, the banks provide loans to various entrepreneurs from this fund. 

Besides loans can also be taken from banks for various personal needs. The bank charges interest on these loans at a fixed rate. But the interest rate charged by the bank to the borrower is relatively higher than the interest rate payable to the depositor. The difference between these two types of interest rates is the profit of the banks. 

In banking in the chapter, we will know the details about these institutions. Apart from commercial banks, some financial institutions also play an important role in the economic activities of the country. Examples of such institutions in the context of Bangladesh are Investment Corporation of Bangladesh (ICB), Bangladesh Housing Finance Corporation, Bangladesh Krishi Bank etc. These financial institutions play a significant role in the development of different sectors of the economy of Bangladesh.

Conclusion