Why do businesses need finance?
There are so many different tasks that are required to be fulfilled when you start a new business or gain investment with significant growth. You must adhere to guidelines set out by the government in order to operate legally.
This article will discuss exactly what you need to do to set your business up for success, allowing you to take control of finances.
Knowing exactly how much money is coming in and out of your business is not always as easy to work out as it seems. Businesses need to consider how to fund their activities when starting up and during their day-to-day operations. Various costs need to be covered, such as equipment, website fees, stock and paying bills.
Depending on the type of business, it will need to finance the purchase of assets, materials and employing people. There will also need to be money to cover the running costs. It may be some time before the business generates enough cash from sales to pay for these costs. Learn more about cash flow forecasting here.
How many startups do you know that truly started without any investment?
Let’s discuss startups!
Suppose you are thinking about starting up your own business because you’ve had a great new idea that you think could be profitable, or you want to turn an enjoyable hobby into a big earner. In that case, there can be a few things standing in your way of making it to the next step.
These include covering your working capital requirements and asset purchases, but also upfront costs such as seeking legal, accounting or business advice; looking to patent or trademark an idea or brand, or putting down a deposit for a lease. All things you might not be able to get your business up and running without!
So, what could you do about this? Options could include saving money, but saving can take a long time, and entering into a joint venture with a partner can dilute control and most importantly your own profits.
So, another option is to seek a small business loan. Getting advice from an accountant can first help with knowing how much to borrow and structure a loan – with the lender taking security over physical assets. Shorter loans are also an option, but they typically do not provide the funds a new, business-savvy entrepreneur is looking for.
Now, let’s presume you’re up and running, ready to expand!
As the business grows, it requires a higher capacity and new technology to cut unit costs and keep up and ahead of competitors. New technology is normally relatively expensive to the business. It is seen as a long term investment because the costs will outweigh the money saved or generated for a considerable period. Also, remember new technology is not just dealing with computer systems, but also new machinery and tools to perform processes quicker, more efficiently and with improved quality.
How can a business manage the risk of this investment? Finance!
The owner of a marketing company might need to hire a new sales team that costs tens of thousands of pounds, for instance. Suppose it is needed to immediately generate revenue, such as finding new clients and winning a contract that requires expanding the team. In that case, it can be difficult to find that sum of money at short notice, especially when results are not always guaranteed. That is just one example, but seeking a loan to cover the purchase of the extra expenditure would help the business move to the next level and help it expand and make it more profitable.
For most businesses shifting from a small to medium size, their day-to-day expenses like paying employee wages, rent or paying for equipment will also grow. These outgoings are known as working capital and are the number one reason a business owner will seek finance.
How can working capital financing support a business?
Working capital solutions allow you to plan ahead, supporting both the day-to-day business obligations and the long-term strategic growth objectives. Typical benefits of working capital from banks include; Invoice discounting and supplier finance that can release cash tied up in your sales ledger, this is often at a more competitive cost than short-term financing. Overdraft facilities also can reduce the impact of cash flow fluctuations created by everyday expenses or unexpected financial outgoings; simple funding can be tailored around a business dependent on where the business operates, taking currency into account.
Solutions can be confidential and funding quickly made available once agreed. The main pro’s for working capital include:
- Relatively low-cost financing (if secured)
- Non-dilutive to equity holders
- The amount available to borrowing grows as the business grows
Financing for business growth
There are multiple routes your business could take when looking for finance; there is also a range of reasons as to why you may feel it is necessary to take up, whether it be to enter a new market, expand the team, develop new products or move to new premises.
Regardless of how much cash you have available to start your business, finance is almost inevitable and should not be looked at as a risk, done correctly, it can fund businesses, taking them to the next level!
Other useful links from our knowledge centre:
What is a micro business?
What does SLA mean in business?
Is a charity a business?
Remember to Compare Your Business Costs is here to help your business every step of the way from business advice, or saving you time and money on your business purchases such as: