External finance can be a massive boost to businesses, offering them the funding they need to fulfil their ambitions or overcome challenges. However, despite the value in finance, a report from the Bank of England last year found that only 36% of UK SMEs utilise it.
If you’re unaware of the power of external finance or whether it applies to your business, the key is to understand the reasons that other companies – like yours – use it. You can then identify when it will deliver results for your business, proving a helpful tool in various circumstances.
Below, we have listed the six primary reasons a company might need funding and how finance helps in each situation.
Debt
When people think about finance, they probably most commonly associate it with businesses that are in debt. This is also why many companies avoid it – they believe that if they don’t have cash flow issues, they don’t need external support.
There is no denying that debt is a reason that some businesses will seek funding. There are specific loans and funding sources that have been created to help companies overcome hard times. Recently, this has been seen in the range of support offered to businesses through the coronavirus pandemic, including the Bounce Back and Coronavirus Business Interruption loan schemes and more recently the Recovery Loan Scheme.
In these scenarios, external funding works by providing you the money you need via a loan, which results in a regular repayment schedule until you have fully paid off the balance.
If you are utilising funds to cover debt issues, you must have a sufficient plan to stabilise your business and meet the repayment commitments you have agreed to. If you don’t, it could result in further debt and cash flow issues, which will be hard to recover from. So, tread carefully and be confident that you are making the right decision for your business.
While external finance can be utilised to ease debt issues, it is not the only purpose. We explore some of the alternatives next.
Cash flow
Running a business takes a steady stream of money into the business that enables you to cover your various costs – such as supplies, salaries, overheads and so on. However, obstacles like unexpected costs or late customer payments can hamper your cash flow, making it harder to keep up with your spending commitments.
In these cases, external finance may boost your cash flow, helping you maintain fluidity until these blockages have eased. This will enable you to continue operating smoothly and absorbing the expenses you need to, without risking defaulting on payments or falling into arrears.
Various solutions will support you in any cash flow struggles. These include invoice finance, designed to unleash cash locked in your unpaid invoices through a loan you repay when your clients pay you, or other short-term loans.
By taking quick action when you first notice cash flow problems and identifying the right funding solution, you can minimise the impact on your operations and finances while freeing up capital to use elsewhere in your business.
Start up
Many businesses will need to raise finance before they can establish themselves. There are many costs associated with starting a venture, including acquiring plant and machinery, equipment, staff, supplies and so on. There may also be costs related to business planning and processes.
At this early stage, these enterprises will not be generating free cash through revenue or profit. Due to this, external funding is crucial for raising the capital you need to set up and grow the business.
There are options for any entrepreneur seeking the funds to start their business. Investment is typically associated with this need, helping promising enterprises to secure high levels of finance in exchange for equity. However, there are cashflow loans that can help finance flourishing and growing ventures.
Debt solutions like commercial mortgages and leasing/hire-purchase can also enable companies to obtain property and assets for their operations.
By using external finance at this initial stage, you can build robust foundations for your business, by accessing the funding you need, which will set it off on the best path.
Fuel productivity
Another common use of external finance is to fuel productivity and processes within a business without placing a financial strain on your business.
Two examples of this include trade and stock finance. Trade finance is a popular tool for businesses that import and export, funding around 80-90% of the world’s trade. It works to close the gap between orders you have received and the cost of your supplies to deliver those orders, allowing you to access the materials you need to fulfil and deliver while you await payment. It also creates trust between buyer and seller by mitigating risk for both.
On the other hand, stock finance works by taking supplies sat in your warehouse or factory and raising finance against it. It eases cash flow by allowing you to unlock capital tied up in your stock, but still gives you access to the materials you need to operate.
Although two different forms of finance, stock and trade finance solutions are designed to boost your operations by allowing you to be productive – either through fuelling overseas transactions or enabling you to fulfil orders – without pressuring your accounts. Even if you aren’t experiencing cash flow issues, utilising this type of funding can keep it that way by maintaining fluidity at all times. But it is important that you have healthy margins.
Growth
Many businesses will have growth ambitions they want to fulfil. When the right time comes to take that next step, you want to do so quickly and successfully.
Depending on your growth goals, scaling up will come at a cost. It’s no surprise, therefore, that external funding is crucial. There are many ways financing is used to accelerate expansion, including:
- Business mortgages to acquire additional premises
- Leasing and hire-purchase to obtain more equipment and assets
- Funding to facilitate mergers or acquisitions
- Loans or investment to allow new processes and hire new staff
- Funding for infrastructure changes
- R&D tax credits to utilise against innovation
- Finance to support your growth in revenue
There are many forms of growth finance, including bank loans, investment, crowdfunding, peer-to-peer lending and grants, to name a few. By finding the right option for your business, you can ensure you expand responsibly and effectively, allowing you to reach your goals and achieve long-term results.
In many cases, growth would be smaller, slower or even impossible without external funding, so businesses who understand its ability in this area will be equipping themselves for a better chance of success.
Turnaround
While a business will make every effort to get out of a trying situation, there may come a time when you have exhausted your options. In this scenario, the only way to get back on track is to turn around your company, which might include turnaround or restructuring.
The process of turning around a venture can be costly. You need financial assistance to restabilise your business, as well as potentially introduce new processes and people. Without financial stability and good foundations, your business may not have a future.
The added challenge is that you will often be in a less-than-ideal financial state, especially if sales and revenue have been falling for some time. Some lenders will be averse to offering you funding if you are undergoing a struggle, so it’s essential to identify external funders who are willing to work with you and genuinely help.
Fortunately, there are turnaround finance providers out there who will assist you in getting your business into better shape before putting you in front of investors who can provide long-term funding. These can be a lifeline for companies who have already done everything they can to save themselves but, without external support, would be looking at bankruptcy, scaling back or dissolving.
Conclusion
Although a minority of SMEs may utilise it, external funding plays a crucial role in helping businesses survive troubles, embrace opportunity and maximise results. By being informed about the purposes of finance and understanding the benefits it could offer your business, you can reap the rewards by using the right solutions at the correct times.
With external finance to back you up, you can improve resilience and empower growth – so you can achieve your goals and drive long-term results.
If you’re still unsure of how external finance may help you, speaking with a financial advisor should uncover the information you need and allow you to weigh up your options.
At Pegasus Funding, we can work with you to find the right solution. Our team has expertise across a wide variety of funding types, so we can discuss your options and the support that external finance can offer, whatever your funding need is.