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Why Do Businesses Need Finance?

Business finance could potentially help a business at any stage of its journey, whether it’s just starting up or is looking to expand. So, knowing how to manage your business’ finances and how best to spend any additional money could help you make the most out of any emerging opportunities and keep yourself afloat.
Why Do Businesses Need Finance?

Updated on 24/09/2020

Whether a business is just starting out, struggling a little and trying to stay afloat, or thriving and looking to seize every growth opportunity available- it may need access to extra funding in order to take steps forward. That’s where business finance becomes helpful.

In this article, we’ll explain what business finance is, identify why businesses may need finance, and explore the potential downsides of giving business finance a miss.

What is business finance?

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‘Business finance’ is the money that may be needed to establish or run your business. It describes the type of commercial funding that’s used to improve a business’s stability, profitability and growth.

The main areas within business finance that may be useful to have a basic understanding of are the main methods for sourcing finance and how to effectively use it once sourced. Generally speaking, though, finance can be acquired through business loans, grants or other activities such as crowdfunding.

Choosing to finance a small business through a loan is not uncommon, with business loans proving to be one of the most popular sources of business finance due to the various repayment lengths, loan rates and overall flexibility offered by different lenders.

Business loans themselves are an example of an external source of finance. This is where funds are found outside of the business from lenders, investors or banks. The opposite of this is internal sources of finance, which are those found within the business, including assets and profit.

Why may a business need finance?

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Let’s take a look at the top five reasons a business may need finance.

1. To cover start-up costs

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The sort of start-up costs that could really take a toll on a new business owner include equipment costs, employee wages and inventory costs. It’s entirely normal for a business to seek out external finance in its early stages to help power through this often-expensive period in a business’ journey.

Broadly speaking, the higher the value of assets a business owns at its point of inception, or the more personal risk a business owner is willing to stake in the success of the business (for example, using a house as insurance), the better rates the business owner is likely to be granted by lenders across all business finance options.

2. To fund a business expansion

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Business finance isn’t just for new businesses, though. Many existing businesses spot growth opportunities in the market which extra finance could help them tap into. For example, a business may be able to diversify its product offering to meet a new consumer need or trend, or it could look to open a new physical store in a thriving area.

The idea behind using business finance (such as loans) to drive expansion is that the interest rate a business will be paying on any funds acquired in the short-term will be offset by the huge amounts of revenue that they could generate over time from the growth opportunity they’ve spotted.

3. To make a cash flow injection

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We’ve mentioned that business finance can help get a business off the ground or help it reach new heights, but in the middle of that spectrum is maintaining survivability and profitability.

For the majority of businesses, maintaining a steady cash flow is absolutely vital. In SMEs specifically, it is perhaps the single most important concern faced by business owners daily. Sometimes turning to business finance to boost cash flow can help a business survive a difficult period, such as the coronavirus pandemic. It could, for example, allow for enough money in the bank to buy the stock needed to cope with an unexpected and large order.

4. To reinvest often and make incremental improvements

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It’s important for business owners to recognise that continuous investment in your business, either through internal or external funds, may make your business more likely to succeed.

Re-investing in infrastructure, assets, streamlining business processes and improving customer care has the potential to:

  • Make your business more money in the long run.
  • Garner more support from your customer base.
  • Improve your general offering.

To experience these benefits and use business funding to its fullest, a steady growth plan may be needed.

5. To get better lending agreements

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Refinancing is all about swapping out your existing lending agreements for new agreements with slightly more favourable terms. By using business finance to achieve this goal, you may be able to take some of the strain off your business in the long-term by reducing the amount of interest you pay. Or, you could free up some cash in the short-term which may help with day-to-day costs.

What could happen if a business does not have enough finance?

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If a business doesn’t have enough finance or cash flow, it could be at risk of delaying payments to its suppliers or even damaging the general customer experience. This, in turn, could increase the chances of running into working capital issues, amassing bad credit or gaining a bad reputation.

Effectively managing your business’ finances is an obvious key to success for any business but understanding how to fit business finance into this mix may help you find success or continue to expand. The real expertise lies in knowing where to inject cash obtained through financing agreements; should you use it to boost cash flow, inject it into your working capital, or increase your inventory capacity?

For more guidance on the fundamentals of financial management, head over to our blog on how to manage business finances effectively.

Opportunity costs associated with business finance

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It’s worth mentioning that even if your business is doing great and it may feel like you aren’t in need of additional financial support, you could still lose out by avoiding business finance.

How, though? Through opportunity cost. If a business opportunity were to come along which could potentially generate hundreds of thousands for your business, it would likely require some up-front investment.

When the amount of up-front investment required exceeds what the company currently has access to, that’s exactly where a business may look for a financing arrangement to make that big investment possible. We have seen a number of situations similar to this at Esme, for example, you can read about how we helped the financial management company Clear Vision seize a business-changing acquisition opportunity.

Putting business finance knowledge into practice

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If you’re confident with the concepts we’ve touched on today, and have assessed how they could apply to your business, the next step could be to build a deeper understanding of the potential sources of finance available to you.

Beyond acquiring funds for your business, the real challenge lies in how you actually invest your money and where you allocate it to drive your business forward. Many small companies may turn to experienced financial consultants for expertise on how to get the most bang for their buck. Having that guidance could make a large undertaking (such as funding an expansion) that little bit easier.

Business finance for SMEs

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There are a range of business finance solutions available for SMEs. Here at Esme, we offer online business loans which are designed for busy SMEs looking for quick business finance with competitive rates. Our business loans range from £10,000 (or from £25,500 for sole traders) to £250,000 and can be repaid over a 1 to 5 year time period with no set up costs or early repayment fees. Meaning you can choose a loan repayment plan that works for your business and its cash flow.

Before you apply for a loan with us, it’s important to ensure you meet the eligibility requirements below to increase your chances of approval.

  • You must be a sole trader or Director of a UK Limited company that has been actively trading for at least 3 years.
  • Be over 18 years old and a UK resident & homeowner.
  • Have a turnover of more than £50,000 per annum and a track record of making profit.

How could Esme help?

These are difficult times for many businesses, so it’s important now more than ever to take good care of yourself and your team. If you’re concerned about your business being impacted financially due to coronavirus, visit our guidance page for information about how we may be able to support you.