Do you own a startup or small business?
Have you run into cash flow problems at any stage in your business lifecycle?
If so, you've probably got questions about business finance.
Borrowing cash might feel like a daunting step, but done right, business finance can revolutionise things for an organisation.
So if you're wondering why businesses need finance and whether a loan could help you, let us help.
This guide will cover:
- Reasons why small businesses seek funding.
- Reasons why businesses need short-term finance.
- Reasons why businesses need long-term finance.
- How finance will help a business.
- How to fund your business without a loan.
Why small businesses seek funding
There's no particularly cryptic answer to this question. Businesses need finance when they don't have enough cash to fund the things they want to do.
When you're a new business - and this is especially true for start-ups - the list of things you want to do is probably pretty big.
You'll be wanting a premise to work out of, equipment to work with, stock to sell, and much more. You'll need to build a team of skilled, reliable people to work for you, and they'll need to be paid.
As businesses grow, they face similar concerns. Assets may need to be acquired, whether they are machinery, equipment, or something else. Your workforce will expand. You may find yourself wanting to refinance existing loans. Or maybe you'll just need to cover an unexpected shortfall in working capital.
Securing funds for these things can feel like a hurdle, but finance can be the kickstart you need to get things going. Choosing the right type of investment for your needs is the key to success.
Why businesses need short-term finance
With short-term finance, you should expect to repay the money you borrow within a year or so. This will vary on a case-by-case basis, but you'll want to ensure you have a plan to make repayment reasonably soon.
This type of finance is excellent for covering shortfalls, giving yourself enough cash to buy a new round of stock ahead of a busy period, and similar.
Examples of short-term finance are invoice factoring, a business credit card, or a business overdraft.
In invoice factoring, a revolving credit facility is set up against your accounts receivable. A lender will pay you the value of one or more invoices (minus a commission), and you will repay them once you receive payment at your end.
With a credit card, you can spend extra cash to a limit agreed in advance by your lender. This works much the same way as a personal credit card, but the amount available to borrow will be higher.
A business overdraft allows you to spend money when your account reaches zero, to a pre-agreed amount. Check out our guide to small business overdrafts if you'd like to learn more about those.
Why businesses need long-term finance
With long-term finance, you'll be entering into an arrangement that will most likely last several years. This type of borrowing is designed to fund bigger projects and investments, and often involve more significant amounts of capital.
If you want funding to expand your premises, for example, a credit card would not be a sensible way to do this. Instead, a mortgage lasting ten years or more would be a much less punishing way to afford expansion.
Examples of long-term finance include business loans, mortgages, or asset finance.
A loan is probably a familiar concept. You borrow cash and repay it over time, to an agreed payment schedule. The loan will be secured against an asset, or unsecured, depending on your credit rating and various other factors.
A mortgage is a particular type of loan secured against a property. Your share of ownership increases as you pay off the mortgage, and at the end of the term, the property is yours. Mortgages are just one type of property finance available to small businesses.
With asset finance, your lender purchases an asset on your behalf, and you repay them over time while having access to the asset in the meantime. This is ideal for businesses who require expensive machinery to operate but cannot afford to buy outright.
How finance will help your business
Let's take a look at the benefits finance can deliver:
- You can fund expansion, whether it be your premises, workforce, stock levels, vehicle fleet, or more.
- You can keep your business solvent when customers are late in paying their invoices, during seasonal dry patches, or through any other unexpected quiet period.
- You can afford the equipment, stock, premises, or people required to take your business to the next level.
As well as these tangible benefits, borrowing with the right lender also gives you peace of mind. For example, we offer fixed interest rates, quick funding decisions, and dedicated account managers with years of relevant experience.
How to fund your business without a loan
While debt financing is excellent in many situations, business owners also look to other avenues for funding.
Sometimes this is through choice: equity or security may not be required to borrow, reducing exposure. Also, if grants or other support is available, why not make the most of it? This is not restricted to financial aid, either: some new businesses are eligible for incubator programs that offer premises, training, resources, and more. The equivalent cash price of these things would likely be unaffordable for small businesses.
When the decision is made for you, however, things can be more difficult. As the owner of a fledgeling business, you may struggle to find traditional funding. Lenders may be wary of lending to businesses without a proven track record or an established credit history, and they may reject your application.
If this happens, you have options:
- Borrow from friends and family. This is not an option for all of us, but it can work. Jeff Bezos famously borrowed from friends to finance Amazon in the early days: we bet they're happy with their decisions now!
- Crowdfunding can attract small investments from multiple sources, giving businesses the confidence and capital they need to move forward.
- Angel investors are people who have achieved business success and now turn their attention (and pocketbook) toward small businesses with potential. A willing investor can bring money and experience into your business.
In short, you have options
We've briefly touched on a few finance solutions available to small businesses, but the critical point to take home is that you have options.
Businesses of all sizes need funding for all sorts of projects and investments. And in an ever-expanding industry, there are more opportunities for investment than ever before.
To find out what finance is available for your business, and which type would best suit your needs, get in touch with our team today.