Capital Budgeting Defined

• Capital budgeting is a business accounting term for redirecting a business's available monetary capital. An example of capital budgeting would be a business that sets aside a fixed percentage of annual revenue with the express purpose of eventual use on future expansions into new markets. Direct capital budgeting is more common in businesses that are publicly traded, such as sole proprietorships, where capital gains aren't tied up in dividend returns to shareholders.
  
  

Financing Defined

• Financing a business decision refers to borrowing money to fund a project, expansion or as a short-term emergency operations funding measure. Financing is routinely used by larger businesses to fund major initiatives that would normally be beyond the grasp of the company given its annual revenues. Financing is also used by smaller businesses, often in the form of rolling lines of credit; for example, a tradesperson's credit card with a welding supply store, which he uses to obtain materials for his building projects.
  
  

When to Use Company Capital

• Using a company capital budgeting method for expansion works well in either of two main scenarios. The first scenario is when larger companies with very high revenues allocate a portion of that revenue to new product R&D and market expansion. The second scenario is where a small business is looking to expand into its first new branch and may not have the necessary credit rating to obtain expansion financing through traditional means, in which case the only option becomes a capital budgeting decision.
  
  

When to Use Financing

• Large-scale financing, particularly when put toward high-risk ventures, is most economically accomplished by well-established firms with strong credit ratings. A strong credit rating and a history of long-term fiscal stability will reduce the cost of financing a project through borrowing. Small-scale micro-financing, such as small business credit cards or retailer lines of credit, offer an attractive though sometimes-risky avenue to fund the early operations of an entrepreneurial endeavor. Smaller businesses should avoid keeping a balance on financed lines of credit to avoid incurring interest payments. Distilled to the simplest possible advice, financing is best used when the benefits of acting immediately outweigh the risks of failure and the fixed cost of borrowing based upon the interest rate of the loan.