Kathleen Parker FCCA explores the various finance options available to businesses to achieve the next tranche of growth.
Without appropriate funding it can be challenging, if not impossible, to expand your business!
The abundance of financing options available means deciphering which option is best for you may something of a puzzle.
According to the British Business Bank Survey, 60% of SME businesses (0-249 employees) sought some form of external funding in the last three years. Most organisations will suffice through the early stages of the business lifecycle on limited resources but, more often than not entering the growth phase will require additional capital to sustain the rate of development.
The question of how to finance business expansion isn't just a case of reviewing and understanding the options available. Planning and preparation are also absolutely vital. In this post we outline the different sources of funding, when you might need them, and their pros and cons.
Boost existing cashflow to fund future investments
What do you need the finance for?
The reasons for obtaining finance will differ between businesses. Before anything else, you must decide what you need the finance for specifically, to fund expansion. Then you can decipher the sum needed and decide upon which of the financing options are best suited to your requirements.
The different funding options
Business financing usually falls under two categories and here we explain briefly what they are as well as examples of their use.
Bank overdraft facility
Loans from family/friends
Bank overdraft facility
The bank overdraft facility is a viable short term funding option, which is easy to arrange and quite flexible. Be warned though, bank overdrafts often come with hefty interest charges. They are also usually repayable on demand should your bank require it. More often than not businesses will dip into their overdrafts for access to extra funds at times when their cashflow may be stretched.
Loans from family or friends
Short-term loans sought from family and friends can be easier to obtain as they come without the need to approach banks and all the scrutiny that goes with that. Usually such loans will come with lower interest charges, if any interest charge at all. They also offer potentially flexible repayment amounts and more time to service the loan.
This form of finance usually applies if banks or investors aren't showing interest in the business for whatever reason. Being a loan from a family or relative means many people overlook the importance of a formal agreement, which is crucial to determine the re-payment terms. If a disagreement were to arise with the lender, they may demand money back at a time that could be detrimental to the business.
Governments and other organisations often offer financing options whereby the business doesn't end up surrounded in debt. One drawback to this is that many grants are focused on start-ups, not necessarily small, growing businesses. Also, obtaining them usually involves a lot form filling and red tape.
Growing businesses can usually sway them by presenting their upcoming growth as a new business venture rather than an expansion of an enterprise. This might be tricky, but the benefits of funding without losing equity or paying interest might just outweigh any disadvantages grants may bring.
Though many cringe at the thought of taking out loans, often this is a very viable option. Because of the status as a small enterprise, there are some tax exemptions that may apply to your business. Potential danger looms when these loans go unpaid, resulting in large repercussions for your company.
If the loan is serviced then your credit rating will improve which will in turn help any future quest to access more funding. Bank loans tend to be used for things like:
Moving to a new, bigger location
Purchasing equipment for the business
Obtaining more inventory
Taking on more employees
Venture capital (VC)
Financing through VC investors can be helpful for a growing business because the funding will come with experienced backers who will usually sit on the board. Often, they will push the organisation in many different ways and ask questions that you and your staff might have overlooked.
You'll probably relinquish some ownership. However, the additional capital and the resources acquired through the VCs will likely be integral to future growth.
If you’re looking to grow your business and increase your sales, you may find yourself searching for some extra cash to purchase new assets. An example could be new machinery to increase efficiency. Often growing businesses have enough cash to cover the day-to-day running finances, but purchasing a brand new asset can seem a stretch.
This is where asset financing can be used. It spreads the costs of purchasing an item over a period of time. Repayments tends to be in fixed monthly instalments according to loan terms, until you’ve paid the debt off in full.
A huge benefit of this funding is it ensures your cashflow remains healthy. At the same time you obtain new assets to help you fulfil your growth aspirations. There are pitfalls to this option including prime interest rate charges and it’s not available to every industry.
Deciding which option is right for you
It’s important to consider all of the funding options available to you, including both their benefits and downfalls. Ultimately the funding you choose is down to your discretion and should be driven by the needs and goals of the business.
The content of this post was created on 17/07/2017 and updated on 09/03/2020.
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