In business, understanding your financial position is crucial to survival. You need to manage your cost base and generate profits to stand any chance long-term. Even this will only get you so far – which is why outside funding is equally integral to a business’s journey.
Despite this, external finance is often overlooked and misunderstood. A report for the British Business Bank in 2021 found that only 60% of businesses utilised external funding. Further, one in 10 SMEs were using a government grant exclusively (in the face of the coronavirus pandemic) and no other forms of support.
The report findings highlight that some SMEs still do not understand the value of external funding. This stems from many places: not being aware of the support available, not understanding how finance fits into their plans or worrying that they might end up in debt.
However, external finance is essential for resilience and growth in every business. By understanding it and its role better, you will build a powerful arsenal of financial tools, which enable you to consistently meet your goals and drive results.
We explore why in more detail – plus how to incorporate funding into your business better.
- Why is external finance important?
- The common reasons businesses need finance
- Understanding how finance can help your business
Why is external finance important?
Statistics show that two-thirds of small businesses state they face financial challenges. Of these, 43% claim the most significant challenge they face is paying operational expenses. This typically boils down to a problem with cash flow – which external funding can alleviate with appropriate support.
Further, 86% of SMEs would need to cut costs or source finance from somewhere if they experienced just two months of lost revenue. This highlights how crucial funding can be in times of hardship, enabling businesses to survive temporary falls in income or other setbacks.
The temptation for some business owners will be to bury their heads in the sand over financial issues, which often leads to more significant problems. Having a firm grasp on external finance allows them to overcome barriers and act swiftly to resolve issues. It also avoids further debt, which could ultimately cause closure.
In any scenario, the key is knowing what the best funding option is for you and when to get it to avoid worse repercussions. This is why an understanding of finance is vital so that owners and directors make the right decisions.
The common reasons businesses need finance
It’s a common misconception that only struggling businesses use external finance. There is a multitude of reasons why a company might access funding. Understanding these reasons shows the diverse role financial support can take through the lifespan of a business – and when you might choose to use it in yours.
- To establish a business. When starting a business, there are costs to cover, including arranging premises, purchasing equipment, supplier contracts, etc. External funding proves crucial in this pre-revenue stage.
- To ease cash flow. Cash flow difficulties are common for SMEs, typically stemming from late customers payments, unexpected expenses or a temporary decline in revenue. Funding can be used to ease cash flow in the interim until the issue subsides.
- To overcome an issue. As seen in the coronavirus pandemic, unexpected circumstances can arise and challenge financial stability. In this event, finance can prove essential for survival.
- Achieve growth. Expanding a business requires substantial investment that few companies will be able to front themselves – including the cost of increased staff salaries, buying assets or scaling up operations. External finance is often needed to fuel growth.
Understanding how finance helps your business
To truly understand finance, you need to contemplate what it means for you. Below, we examine how to develop your knowledge of finance and how it helps your business.
Focus on your current needs
Every business will have different financial needs at different times. It’s essential to focus on the current challenges and the potential financial ramifications. Understanding the issues you need to address, and your ideal outcome, makes it much easier to identify a resolution.
Consider your goals
Even if you aren’t experiencing difficulties in your business, there could still be a place for finance. Contemplate what your short and long-term goals and ambitions are – including the position you ultimately want your business to be in.
Depending on the goals, you may need external funding to move towards them. By understanding what you want to achieve, you’ll be able to pinpoint the exact support you want.
Refer to your business plan
Your business should be backed by a strategic plan that dictates how you operate and grow over time. A large part of this plan will include how your finances will evolve and what investment you need to achieve your goals.
It’s worth looking back at this plan and analysing any potential funding gaps that external resources will fill. By taking the time to do this, you will better understand where finance will fit into your strategy – which helps you refine the option that suits you best.
Do your research
Once you have begun to understand the requirements of your business, you need to uncover the support available on the market. The finance market is more diverse than ever, covering debt and equity, alternative and mainstream.
Spend time identifying the main options, including how they work, what they’re suitable for and how to access them. This isn’t a long process, but your knowledge should build over time – including learning the jargon commonly used, criteria you need to meet and when different forms of finance are helpful.
Speak to an independent advisor
Business finance can be complex, especially if you’re new to the game. There are many types of funding available, each of which has unique purposes and eligibility criteria. Unsurprisingly, this can be a lot of information to comprehend.
If you’re struggling to identify the financial support you need, it’s worth speaking to an independent advisor. These are experts in business finance, so they will take you through all the options and determine which is best for your needs. They’ll also help you to build a financial strategy that incorporates the proper external funding at the right time.
Conclusion
We understand that many businesses feel the need to be self-sufficient in their finance. However, this will significantly limit your potential and make it much harder to overcome challenges.
Utilising external finance is powerful for your SME. If you use the appropriate type of funding at the opportune time, you guarantee your company’s long-term survival and growth.
The first step is understanding the role that funding plays. Over time, you will learn what funding solutions you should utilise as part of a financial strategy that allows you to access support to address every objective and obstacle.
If you are looking to identify external finance for your business, speaking to a commercial finance broker or advisor will help you determine the best options.