Kathleen Parker FCCA explores the various finance options available to businesses to help you 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 it can also be quite puzzling in deciphering which option is best for you.
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 the growth phase will require additional capital at some point to sustain the rate of development.
Of note, planning and preparation are absolutely vital to successfully financing business expansion. It can also make this process challenging and potentially overwhelming. In this post we outline the different options available, when you might need them as well as their pros and cons.
What do you need the finance for?
The reasons for obtaining finance will differ between businesses, before anything else, you must decide what you specifically need the finance for to further expand your business. From this you can then decipher the sum needed and thus which of the available financing options are best suited to your business needs.
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 and are 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 every day staff might have overlooked.
You'll probably relinquish some ownership, but the additional capital and the resources acquired through the VCs will likely be integral to the future development of your business.
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 such as new machinery to increase business efficiency. Often growing businesses have enough cash to cover the day to day running finances, but purchasing a brand new asset can seem a world away.
This is where asset financing can be used to spread the costs of purchasing an item over a period of time. It often entails fixed monthly repayments and loan terms until you’ve paid the debt off in full.
A huge benefit of this funding is ensuring your cashflow remains healthy, whilst gaining new assets to help you fulfill your growth aspirations. It’s important to note that there are pitfalls of this funding including prime interest rate charges and it’s not available to every industry sector.
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 is up to date and relevant as at 17/07/2017.
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