What Is the Importance of Business Finance?

Business finance gives companies, including small businesses, the money that is needed to begin operations, expand and hire new personnel. All of these benefits tied to providing capital to companies underscore the importance of business finance because regional economic growth often begins with small business. The pace at which businesses can invest in operations has the potential to influence an economy's gross domestic product (GDP), which is a measure of economic activity. Governments and the private sector devote large sums of money to the proliferation of business activity in a country.

Perhaps a relevant way to examine the importance of business finance is to consider what the business sector might resemble without it. New technologies — including advancements that shape industries and introduce different options to consumers — that require some financier to provide seed capital might never be developed. Businesses with one physical location might never be able to grow into another space without real estate financing. Drug trials that are costly and lengthy might never be completed without some lender or investor who can extend business financing to propel medical advancements.

When a business owner has an idea for a product or service that fills a need in a community, this individual might turn to business financing to bring the concept to reality. There are certain loans that are designed to promote expansion of small businesses, for instance, by providing long-term loans at interest rates that are locked. Subsequently, the business owner can focus on operations and hiring personnel while increasing profits and possibly the number of locations for the business. These specialized loans might ultimately lead to reduced operational costs and fuel future growth in jobs and profits, which is an indication of the role of business finance.

When businesses expand and employ a greater number of individuals, it benefits a community and contributes to the economy. An increase in the size or number of businesses also leads to greater revenue for a federal government. This is because of the greater amount of taxes that are paid, and this revenue stream also contributes to the importance of business finance.

The pace at which financing and investments are applied to business is another indication of the health of an economy. Policymakers, including central banks, establish monetary policy in a region in part based on the state of the consumer, investments and other business financing activity. Subsequently, the importance of business finance can be evidenced in the fact that economic policymakers in a region consider this activity when making decisions that affect the entire region.