The Concept Of Financing | Classification Of Financing | Importance of Business Financing

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


Financing deals with fund management. The number of funds raised from any source, where and how to invest will be the maximum profit in the business, finance formulation, and implementation of the plan. In the case of a business organization, money comes from the sale of goods. Different types of funds are required for the preparation and purchase of goods in the business. Such as the purchase of machinery, purchase of raw materials, payment of wages to the workers, etc. These are the use of funds. According to the need of the fund, funds have to be raised as per the plan so that the production process continues. Financing refers to the process of raising and using funds.

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.

The importance of business financing

At present, in order to make a profit in a competitive free market system, every government, private and international business organization has to finance with special importance as per the pre-plan.

The use of well-thought-out and efficient financing management reduces the risk to businesses and increases profits. The following points make financing management more meaningful.

A) Business capital crisis

In the context of Bangladesh, the concept of financing is of special importance. As Bangladesh is a developing country, the financial crisis is a daily occurrence for businesses. Dealing with this crisis and managing the organization smoothly is a difficult task. 

For example, an organization needs to buy raw materials but if it is unable to buy the right amount of raw materials in time due to a financial crisis, then the production process of the organization may be disrupted. Financing concepts help him to collect the required amount of money in a timely manner as per the plan and use it properly.

B) Backward banking system

In addition, as in the developed world, our financial institutions are not well-organized enough to apply for loans, but loans are not available within the desired time. Many times that property is mortgaged as opposed to a bank loan. However, due to its scarcity, bank loans are not available at the right time and in the right amount. As a result, there are well-planned sources of funding for businesses to deal with the crisis.Is to be done and the money needs to be used profitably through proper investment decisions. Proper financial planning and management help traders anticipate such problems and give an idea of ​​the ways in which they can be tackled.

C) Less educated entrepreneurs

Entrepreneurs in most small businesses in Bangladesh are poorly educated and cannot manage financing through a long-term plan. As a result, many for-profit organizations are unable to cope with the financial crisis due to a lack of proper financial planning and ultimately incur losses instead of profits is encountered.

But the reason for this loss is only financial mismanagement. Knowledge of financing management can easily enable a businessman to make a reasonable profit by providing the required amount of money at a low cost as planned.

D) Productive investment and national income

A successful investment plays a direct role in increasing national income.

Using the knowledge of finance, a businessman analyzes the possibility of future income-expenditure among the various investment projects and can choose the profitable project.

Such profitable investments are as important for the business as they are for the economic development of the country as a whole.

Business financing policy

Business finance management refers to the collection of funds required for a business, the investment of those funds in the short and long term, and the management of the distribution of funds. There are some principles of this management, which are outlined below.

A) Liquidity vs profit policy

A grocer’s entire daily cash income (liquid assets) is used to purchase raw materials and
He may keep some of the ancillary expenses to himself or keep some of the cash for the purchase of raw materials and deposit the rest in a bank account, from which it is possible to get some interest/profit at certain times. In this case, the shopkeeper has to decide, how much cash can be kept with him to meet his daily needs. 

If the shopkeeper keeps a large amount of cash, the amount of income due from the bank will decrease. Again, investing too much money in the bank will lead to a shortage of cash required to meet the day-to-day expenses of the business, which will hamper the smooth running of the business. 

As a result, traders need to manage their finances with a balance between liquidity and investment. In other words, on the one hand, he needs to have cash in hand to run his daily activities, on the other hand, he also needs to invest that money to make a profit.

The inverse relationship between cash and profit. If you keep more cash, the profit decreases, and if you invest more to increase the profit, there is a liquidity deficit. Maintaining a proper balance between liquidity and profit is one of the principles of financing.

B) Principles of suitability

It is a principle of financing to provide working capital with short-term funds and fixed capital with long-term funds. Working capital is the amount of money that is needed to run a business; Such as: the purchase of raw materials, payment of wages to the workers etc. On the other hand, the purchase of machines, construction of buildings in business, etc. are fixed capital. As the amount of working capital is less, its source is also less, so it is better to collect it from a short-term source. Commercial banks, various financial institutions, investment banks, and debenture holders, such sources provide long-term loans. 

On the other hand, working capital should be managed with the proceeds from the sale. Lenders have to pay higher interest rates to raise funds from long-term sources. As a result, if money is raised from a long-term source to meet current expenses, it becomes impossible to pay interest on the loan from the earned income.

C) Business diversification and risk allocation

In the case of fund investments, if the business product or service is as diverse as possible, the business risk is reduced. Every business tries to make a profit by focusing on the uncertain future. As a result, the business has to face various risks.

These risks can be caused by a variety of reasons. Such as:
Changes in an economic, political, social context,
Presence of new products in the market, natural disasters, accidents, etc. It is usually not possible for managers to control or prepare for these changes. 

However, following the risk-sharing policy, it is possible to achieve the expected profit even in uncertain market conditions. If a trader trades only one type of product, then the profit of the business becomes quite risky.

On the other hand, if the products of the business are diverse and varied, then the risk is distributed. In other words, if the sales of one product decrease in any one situation, it is possible to make up for the lost sales of the business by selling other products, so that the desired amount of profit is achieved in all cases. A grocer if the trader sells both traditional soap and halal soap in his shop, then both types of buyers will come to the shop. If the shopkeeper only keeps ordinary or traditional soap, then the buyers of halal soap will go to other shops and buy halal soap, which only the traditional soap seller total sales will decline. Sales of some products also decrease or increase depending on the weather and the seasons.

For example, the demand for winter clothes is higher only in winter. As a result, its sales increase during this time. If a garment seller sells both winter and summer garments in his shop, the profit margin will not be affected by the increase or decrease in the demand for seasonal products.

Thus if a bookstore sells only poetry books, and if another store sells poetry books, story books, religious books, and various educational books, then it is seen that shoppers will flock to the next shop to buy books. Because buyers can buy all kinds of necessary books from there at the same time. This policy of risk diversification can be used to raise funds.

There is a predominance of raising funds from multiple sources rather than one source.

Functions of Financial Manager

Financial managers work with two types of decisions:

1. Income decision or financing decision
2. Expenditure decision or investment decision

Income decision or financing decision

Income decision refers to the process of raising funds. Under the financing decision, a financing plan is adopted by selecting different sources of fundraising and analyzing the advantages and disadvantages of these sources. 

Funds are usually raised from short-term sources for current expenditure and from long-term sources for fixed expenditure. Business funds are usually raised through the owner’s own capital and borrowing from various sources.

In addition, large companies can raise capital through the sale of shares. These shareholders own the company. A debt of the organization for the part of the fund that an organization collects through loans as the liability increases, again the rights of the owner are established based on the amount of capital collected from the owner. 

As a result, it is through proper financing decisions that an organization succeeds in creating a profitable balance between debt obligations and ownership.

Expenditure decision or investment decision

The decision to purchase a sewing machine from a tailor shop is an investment decision. The decision to purchase grocery store furniture and refrigerators is an investment decision. For manufacturing organizations, the purchase of production-oriented machines, and the cost of building a factory is also such a decision. This decision is to make a plan of the expected arrival and departure. 

For example, the decision of the manufacturer regarding the purchase of the machine is taken. If sales of machine-made goods increase,
This increases if the profit and cash flow increase and if the total cash flow exceeds the purchase price of the machine. That is, if the machine is thought to be usable for the next ten years, the investment decision of the machine must be compared with the purchase price of the machine with the proceeds from the sale of goods over the next ten years. 

So what will be the price of the product and how much will be sold in the next ten years
Only by considering can it be possible to calculate the cash flow for the next ten years. In order to determine the amount of profit from cash flow, it is necessary to determine the cash flow by deducting production and other expenses from the proceeds of the sale.

The investment decision is an important decision for the organization as determining the number of future product sales and pricing of the product is a difficult task.

Other decisions

The above two decisions are the most important for the financial manager. Also to the financial manager some more decisions have to be made, such as-

A) What amount of raw material is suitable for purchase or organization and where to collect that money this decision is called current investment decision.

B) How much cash should be kept to meet daily needs is also an important decision.

C) Another decision is to pay the dues from the sources from which the funds have been collected.
The decision to pay interest on time is an important responsibility of the financial manager when funds are raised through bank loans and other loans such as bonds, debentures etc. 

Similarly, in the case of funds raised through the sale of shares, the expected rate of return on profits and the distribution of dividends are important considerations for the financial manager.

The trend of financing

It was only after the Industrial Revolution of the seventeenth century that production techniques became more complex and the process of production flourished through specialized and divided processes. Financing concepts and uses become vital to surviving market competition. In the eighteenth century, with the development of accounting, finance was primarily engaged in the analysis of financial statements. 

In the late nineteenth century, financing was associated with the development of the classical business economy as well as the business’s own and specialized economy. This trend of financing gives us a meaningful idea about the nature and scope of financing. In the traditional sense, the main responsibility of financial managers was to maintain accounts and prepare future activities after analyzing them.

In addition to making various reports about the actual condition of the organization and managing the cash so that the organization is able to pay its bills on time, it is also included in the development process of financing. But with the development of civilization, the scope and technological development of the organization has changed the responsibilities of financial managers. 

The evolution of financing in the United States, the main pasture for the development of financing, which took place in the last century, later became known as the evolutionary trend of financing around the world.

The progression of financing is presented in a phased manner:

A) Pre-1930s: During this period, the consolidation trend among US companies began. An organization should be merged with an organization by analyzing the financial statements. Financial managers have a responsibility to outline this. They are responsible for generating huge sums of money and financial statements in this consolidation.

B) 1930s: The consolidation trend has not been successful in the United States. Many of the organizations that were integrated in the previous decade went bankrupt in the next decade. In addition, the Great Depression began in the United States in the 1930s. Many for-profit organizations also fall on the list of losers. At the same time, the financial manager has a special responsibility to restructure the business and save the company from bankruptcy. From this time onwards there was a need to finance the sale of shares.

C) The 1940s: At this time the need for liquidity to run the business smoothly can be particularly realized. Financing through well-planned cash flow by budgeting cash flow fulfills that responsibility.

D) the 1950s: The most lucrative investment in this decade was by changing the pre-financing approach
Various types of mathematical analysis are used in project evaluation. Through far-reaching estimates
The only way to maximize profits is to increase sales and reduce costs by making appropriate long-term investments becomes the main function of financing. This section is considered as the traditional section of financing.

F) 1980s: The journey of modern finance started from this time. Financing the capital market
Begins to prioritize. Shareholders are the property of the shareholders as a result of owning the organization or the purpose of financing this period was to maximize the market price of the stock. In order to achieve this objective, various financial analytical activities are started. The concept of risk in financing implies that as profits increase, so does risk. So profit growth may not always be desirable.

G) 1980s: This decade marks the beginning of the computer chapter, which is not just about production techniques, the transaction also changes the financing. Financing has now become arithmetic. Most financial decisions are mainly based on complex arithmetic and the tendency to perform them smoothly through computer is gaining popularity at this time. The concept of such risk is now much more accurately measured and managed.

The traditional concept of capital structure is also very complex and arithmetic. Notable among those who enriched the theoretical business financing during this period were Harry Marcois, Marton Miller, and Modigliani. Later in the 1990s, these theorists were awarded the Nobel Prize for their important role in advancing the financing of the medium of mathematical analysis.

1970s: Financing emerges by changing its traditional responsibilities for business expansion and survival in a competitive market. At this time, the efficient distribution of capital among the various projects of the organization and the analysis of the income earned from the projects was the main issue of financing.

1990s and the beginning of modern financing:

In this decade the World Trade Organization made its debut. Obstacles to global import-export are greatly reduced. Financing also gained internationality at this time. On the one hand, the investment decision of financing takes into account where in the world it is profitable to manufacture and sell a product, on the other hand, the nature of any capital market in the world and where it is profitable to raise funds also becomes the subject of financing. 

As a result, financing is a practical solution to the management of a business, which is a combination of accounting, economics, and other financial issues.


Thanks for reading! In this article, we’ve provided you with a comprehensive understanding of the concept of financing. We’ve explained the different types of financing available to businesses, and we’ve provided tips on how to find the best lender for your business. By reading through this article, you’ll be well on your way to finding the best financing solution for your business!


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