11 ways business finance can help your business
Business finance is given bad press at times. Some SME owners only turn to finance when they’re in financial trouble. They resist going down that road until they feel it’s absolutely necessary. However, used wisely, business finance can be a game changer.
If you think about it, most people starting out in adult life need a mortgage to buy their house. If they don’t want to keep renting, that’s just the way it works. And the big boys most definitely leverage external finance to fund expansion; in fact it’s often their first port of call. So does that mean smaller concerns can benefit too? The answer is, yes, in many ways…
Cash flow is the lifeblood of a business. If it seizes up, the business dies. But managing money within a business isn’t just critical to its survival, it’s also what oils growth and releases the latent potential a business holds.
How business finance can make a difference to an SME
- You can get what you need when you need it
The chicken and egg conundrum of needing money to make money can be solved through finance. Regardless of whether a fabulous opportunity has landed at your feet, or key equipment needs replacing, prior planning can’t always ensure there’s enough in the pot at the time you need it. Borrowing is often a great solution that enables you to respond quickly and agilely to the challenge.
- Protects reserves and spread the costs
Using up all your reserves to fund an opportunity isn’t necessarily a good plan. That pot you’re dipping into could be useful as a rainy-day fund for an emergency in the future. Getting a loan for new projects, and spreading the cost of those plans over time, ensures your pot remains intact and enables you to simply pay off the loan as you generate more revenue.
- It fuels expansion
As your business grows, it’s likely that equipment directly related to the volume of sales needs to increase. Borrowing to achieve this expansion enables further potential in your business to be released and future revenue to finance the funding.
- It enables you to plan
Lenders will often agree an interest rate with an SME in advance of a loan. This then ensures that the monthly payments can be predicted over the term of the loan. Thus, a business knows exactly what will be going out and when, which provides a valuable sense of certainty for long term business planning.
- Make hay when the sun shines
When interest rates are low, it’s a great opportunity for businesses to fund their activities cheaply, whilst retaining their reserves for more tumultuous times. Business finance need not always be the expensive option some business owners think it is.
- Boosts business credit score
As with personal credit scoring, having a track record of reliably servicing a level of debt makes borrowing much easier when it’s really needed. Making it a policy to maintain a good credit score isn’t just a whim, it brings solid business benefits, and making use of business finance from time to time is one way of achieving this.
- Helps to ringfence a business owner’s personal assets
When they start up in business, many owners finance it from their own wealth. That’s great to begin with but isn’t something you have to do once you’re up and running. With the right advice and financial management, business finance will protect your personal reserves and ensure your business is an independent entity. Great for the future when you might be looking to exit from the business.
- Reduces dependency on an overdraft
There’s no doubt that bank overdrafts can be the saving grace for business cashflow. However, that isn’t necessarily the best way to operate. Overdrafts are fantastic in emergencies, but when they become part of the business modus operandi, something needs to change. Using business finance to achieve this enables a business to fund its operational costs properly through the business and leaves the overdraft for those rare times you actually need it.
- Can offer tax advantages
Different types of funding enable a business to manage an asset in different ways through the accounts. For example, a hire purchase agreement may enable you to claim an annual investment allowance and depreciate the asset on your books. An operating lease agreement, on the other hand, may enable you to deduct the entire monthly payment as a business cost before your corporation tax is calculated. The best thing to do is check with your accountant. They will advise you on the best way to fund new equipment to the benefit of your business and finances.
- Helps to beat inflation
Equipment bought at today’s prices through business funding will often be cheaper than if you wait 12 months to ‘save up’ and buy it later. Plus, you have the benefit of using that equipment immediately in your business to increase revenue and grow.
- Provides constant access to the most up to date equipment
As equipment and machinery gets older, it tends to need more maintenance. This can start to get expensive but because a business has bought it, an owner is often loath to sell it. Certain types of business financing will enable a business to invest in machinery and update it regularly. This ensures the best machinery is in use to enable the business to flourish and grow.
As you can see, borrowing money to manage the finances and cash in your business can be a valuable part of a growth strategy. It is not an approach that is purely a last measure for business survival. Quite the opposite. When purposefully planned and employed, it can enable a business to grow faster in a stable and controlled way.
Roger loves ‘getting his hands dirty’, working with emerging, small-to-medium and family businesses to ensure they receive the best possible accountancy advice.
Using an extensive network of business contacts to leverage the best guidance and practical solutions, he has been called a Business Godparent due to his caring, hands-on approach.
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