Businesses need finance for a variety of different purposes, but there are some common reasons why businesses apply for funding.
Reasons can include business grants and loans for working capital, to buy machinery, to hire more staff, or even re-finance existing loans to reduce monthly costs. A British Business Bank Survey published in 2019 found that 44% of SME businesses sought some form of external funding in the previous three years. Read on to discover the 5 most common reasons that most businesses apply for finance.
Main reasons for seeking business finance
Working capital
Sufficient working capital is a key aspect of any company’s financial health, and not having enough working capital can have a serious impact on the future of your business. Many businesses choose to apply for external funding to create enough working capital to enable them to fulfil their growth ambitions. A loan can cover short-term funding requirements while giving the business the money it needs to grow, or can bridge the gap between customer orders and supplier payments to help the company meet its funding obligations. Figures from the British Business Bank’s 2019 Business Funding Survey showed that working capital is the most common reason for small businesses to seek funding.
Working capital funding can also allow your company to take advantage of new opportunities that arise, investing in new products or services to enable you to expand. Working capital loans can provide a useful ‘cushion’ for your company should you need a bit of extra cash – you’ll know your day-to- day running costs are covered with a loan, so you’ll have the funds available to meet any unexpected costs. Seasonal businesses may benefit from working capital funding during their quieter periods to cover basic expenses.
Asset purchase
Growing your business and increasing sales often requires you to purchase assets such as new machinery or vehicles. While you may have enough cash to cover working capital expenses for your company, you may look for a loan to cover the purchase of new assets to enable your business to expand. An asset funding loan is a great way to spread the costs of acquiring an expensive new asset. Fixed monthly repayments and loan terms from 6 months to 5 years can help you plan your cash flow in advance so you can make the most of your opportunity to grow.
An asset purchase loan can be used to buy different things for your business, depending on what you need to fulfil your expansion plans. Funds can be used for business vehicles, whether you’re looking to buy your company’s first vehicle or want to increase capacity by adding to your existing fleet. You could also use a loan to buy office and IT equipment to make sure your staff have everything they need to grow the business, or new machinery to enable you to make new products or scale up production while spreading the cost instead of paying a large amount upfront.
Starting a business
New businesses that are still in the startup stage will need funding to get off the ground, and good cash flow is essential to a small business. While most directors will use their own funds to start the business, very few manage to entirely self-fund the company to profitability, and will therefore have to seek external funding. There are a variety of options for external startup funding, including bank loans, borrowing from family and friends, equity investment from a business angel, crowdfunding, and funding grants. A loan to start a business can be used for everything from buying stock to marketing to hiring staff, but startup funding can be difficult to secure and many traditional finance providers will require lots of information, such as a detailed business plan.
Growth funding
If you’re looking to grow your business to take it to the next level, you may very well need funding that enables you to execute on your business plans. Whether you want to increase sales, expand your range of products or services, move into new premises, hire more staff, or expand internationally, a loan for growth finance can help. However you are planning to expand your business, growth finance that’s right for your company can help you take advantage of new opportunities and make your ambitions a reality. If your business has its daily running costs covered, external funding may be the solution you need to grow. Many such loans will have fixed monthly repayments over the term of the loan, enabling you to more easily plan your business finances as you grow.
Debt restructuring
If you need to restructure your company’s debt, a loan that consolidates your borrowings and reduces costs can make your finances more manageable for your business. A loan to restructure your existing debt can make financial planning easier by reducing the number of monthly repayments you have to keep track of, and could potentially reduce your total monthly repayments. Refinancing your existing company debt can help your company grow by freeing up cash in your business for working capital and expansion.
How to know when you will have a cash gap
Are you looking to forecast when you might need to apply for business funding? Check out Float Cash Flow Forecasting for easy to use, always up to date software that keeps your cash flow forecast updated automatically with what’s really going on in your business. Using scenario planning, you can plan for the months ahead and see any cash gaps before they happen.
In the current climate, many businesses are seeking out different means of funding. But in order to understand whether or not your business may need funding due to the COVID-19 outbreak, you need a reliable cash flow forecast. We’re currently offering a free trial to help you combat any coronavirus cash flow concerns and we have a COVID-19 hub packed with resources to support you.
This article is based on an original article by Ian Cunningham from LendingCrowd, an award-winning peer-to-peer lending platform that matches investors with UK SMEs seeking business loans.