What is funding?
Investopedia puts it simply. It is the process of providing funds for business activities, making purchases or investing. Funding can be provided in two ways, through equity or through debt.
What is equity finance?
In its simplest explanation, equity finance is when the owners of the business put in their own money into the business to start the business, pay suppliers, buy stock, buy another business or even pay salaries.
Usually, there are no monthly repayments and little to no interest and if the company goes bankrupt, there is no obligation to pay back the money that the owners put into the business.
This is acceptable when the owners are cash flush or have access to family and friends that will keep borrowing from them with no expectation of a return.
What is debt finance?
Most people have experienced some form of debt finance in their lifetime, be it a car loan or a bond. Therefore, debt financing is when a third party, usually a bank or other financing institution borrows your business the money it needs in return for interest repayments as well as the repayment of the original amount borrowed.
There are a variety of financing solutions out there these days and careful consideration must be given to them before making your choice. As a business owner, when cash flows are constrained, the knee-jerk reaction is to take the first offer of finance one gets with little consideration of the longer-term effects on cash flows and the business.
When to seek out funding for your business
There are two main reasons why any business seeks out finance. One is to grow and one is to fill in a cash flow deficit.
I don’t need to say much about our objectivity when we’re in a crisis. So it goes without saying that the best time to look for finance is NOT when we’re in a crisis.
In our opinion, the best time to seek out financing is when your business is doing well. During this time, the credit score of your business is probably better and you have time to assess the different options available to you and make a better decision for your business. In reviewing your cash flow projections with your accountant as well as your business’s growth plans, you will pick up when your business needs finance and that would be your reason to seek out finance when your business is doing well.
Main reasons why you need financing
Purchasing assets
Depending on the kind of business you’re in, you may need to invest in purchasing machinery that can improve your production increasing the number of products to sell. Or you may need more vehicles to improve your service delivery to customers.
Working capital
This is the lifeblood of your business. Having sufficient cash resources for day-to-day expenses can help with improved profit margins. Paying a supplier earlier can earn you early-settlement discounts, or purchasing additional stock to increase sales.
Growth funding
As a business that’s been running successfully for a while, you may need money to expand. This can mean more motor vehicles, moving to new premises, hiring additional staff or even investing in the development of new technology. Often, this cannot be done without funding.
Property finance
Part of the growth can be an investment in commercial property. The business could be looking to purchase property for its own operations or as an investment to secure an additional stream of revenue. This kind of finance is usually specialised and needs careful consideration.
We’re going to be focusing on business finance during the month of July this year. Stay tuned for more articles and advice on our blog. As always, if you need assistance from us, we’re a call away.
