At LoanGuru, we’re often asked ‘why do businesses need finance?’ There’s a misconception out there that taking on debt is poor business practice. Many people assume that debt is a recipe for disaster in the commercial world.
Of course, for any business to succeed, there needs to be more money coming in than going out. The mistake that people make is assuming that financing swings this balance in the wrong direction.
In reality, there are countless situations where taking on debt can help your business to increase its profitability, both in the short and long term.
So why do businesses need finance? Today, we’ll look at five of the most common reasons to seek out external funding.
Investing in Assets
Purchasing assets is one of the most common reasons that businesses need finance. Typically, this involves equipment of some description. Very few businesses are able to turn a profit without the right equipment.
This could be anything from office equipment to highly specialised machinery.
The trouble is, that many businesses don’t have the cash to buy these assets up front. This creates a catch-22 situation, as you can’t make money without the right tools, but you can’t acquire the tools without money.
As such, machinery and equipment finance is often crucial to businesses getting off the ground and growing.
This allows you to spread the cost of your equipment, over a period of anything from a few months to several years, with fixed monthly payments. Naturally, this is a lot more manageable for many businesses than up-front payment.
There are other situations where asset finance is commonly used besides equipment purchases. Examples include new premises, property, or even intangible assets like financial products, depending on your business needs.
When starting a business, one of the first hurdles is finding enough money to get off the ground. After all, launching a new venture is an expensive process. This includes paying for equipment, office space, staff, administrative costs, and hopefully your own wage.
Many new business owners attempt to pay all of these costs out of their own pockets, but few are entirely successful. At some stage, you’ll likely have to seek out external funding, whether this be through a bank loan, borrowing from friends and family, or seeking out an angel investor.
These days, many startups also leverage alternative finance for their new business costs.
This includes new finance options, like Peer-to-Peer lending, which reduces the administrative burden on borrowers, and speeds up the process of securing funds. This is massively valuable in a fast moving startup context.
Many small businesses struggle with cash flow. Essentially, this means having enough money to perform your day to day operations and recurring costs. When you have cash flow problems, you’ll likely struggle to pay wages, keep up with rent, or purchase sufficient stock.
Many new businesses fail because they fail to achieve sustainable cash flow.
There are a number of ways to overcome cash flow problems, using suitable business financing options. For example, you might choose to use financing for large purchases, including equipment and assets, as outlined above, saving money for daily costs.
This can prevent cash flow problems from occurring in the first place
But why do businesses need finance when cash flow problems do occur? Every business owner can tell you a story of a time when they didn’t know where they’d find the money to meet their short term financial obligations.
Here, smart business financing is crucial. For example, when faced with cash flow problems, many businesses opt for a merchant cash advance, from their card machine provider, in order to make it to the end of the month.
Also known as equity release, refinancing is essentially when you borrow against the current value of assets that you already own. For example, if you chose to refinance a building, the lender would give you its current value up front, which you would then repay over a fixed term.
This is an ideal way for businesses who are rich in assets but lacking in cash to secure funding. Of course, refinancing also comes with risks, as you may lose your assets if you fail to stick to your agreed payment plan.
As such, although refinancing can be a useful financial tool for many businesses, it is worth thinking long and hard about whether it is the best option for you. In most cases, it is best to speak to an experienced business finance expert.
It’s also common for businesses to take on debt in order to achieve further growth. So why do businesses need finance in order to grow? The reality is that there are a number of reasons for this.
Many businesses go into growth mode when they spot a new opportunity. This might be launching a new product, entering a new market, or undertaking an entirely new business vertical.
Most of the time, there are startup costs involved in grasping these opportunities.
In order to grow your business, you’ll likely need to spend money on some combination of hiring, research and development, purchasing new equipment, expanding your premises or building new operations.
These costs can be substantial, but so can the dividends of growth.
The need for finance arises when you can see that you stand to benefit from investment in growth opportunities, but you don’t currently have the means to seize them. In this case, the sensible thing to do is seek out external financing in order to grow your business.
Why Do Businesses Need Finance?
As we can see, there are a wide variety of reasons why businesses need finance. These can relate equally to meeting short-term costs, or to funding longer term strategic objectives. Similarly, businesses of all sizes might choose to take on finance.
The reality is that in many situations, the right financing option is the best way to achieve long term, sustainable profitability, without disruption to your day to day operations. Business finance can also solve a range of common problems, particularly with regards to cash flow.
If you think it may be time for your business to take on finance, speak to LoanGuru today.