There’s an old saying that suggests it takes money to make money, and that’s certainly true when growing a business. The hard part can be finding those funds in the first place.
Written by Liz Swanton
If you are in this position, it makes sense to start by nailing down the precise requirement for the money. There are various types of finance available, depending on what you need to do – and many of them differ markedly from the types of finance typically obtained for personal use.
However, before you go looking for funding, it’s wise to get your own house in order. In other words, make sure your financial records are squeaky clean and ready for analysis.
Every lending institution or investor will want to see your figures before they hand over their money, so how you have managed your business finances in the past could impact how your business grows in the future.
Talk to your accountant and make sure the two major financial statements
from your business – your profit and loss (P&L) statement and your balance sheet – are up to date.
You may also want to check your cash flow statement, so you – and the potential lender – know exactly where cash comes from, and where it is currently going.
Work with your accountant to prepare a cash flow forecast as well. This will help gauge your capacity to make additional repayments for the types of finance you are considering.
How much funding do you need?
The next step is to work out how much funding you need and where to source it. Your accountant may have some advice, but it could well depend on the life stage of your business.
For a start-up, this might entail financing almost everything, such as the expected start-up costs including wages, superannuation and accounting fees.
For a mature business, the funding might target a specific asset or to cover cash flow when clients are recalcitrant with their payments.
Start by checking if you are eligible for some form of government grant, depending on your business type. Otherwise, most of us would assume the easiest way to get extra money is through an overdraft – but that may not be the best option for your situation.
Consider your options
With any other form of financing, it is important to match the finance facility
with the purpose, to ensure it does what you want it to do.
For example, covering increases in wages, general business overheads and stock levels is very different to a situation where you need new vehicles or equipment. With the latter, you could consider one of a range of small business loans such as equipment loans, hire purchase or leasing.
All of these are examples of debt finance. Like your mortgage, credit cards and any bank loan, they are forms of borrowed money that you repay within an agreed time frame, with interest.
Another option could be equity finance, which includes money invested by family and friends, crowd funding or professional investors. Repayments may not be necessary depending on the arrangement. It could mean losing total control of your business, if the arrangement is for the investor buying in.
Of course, even if this leaves you with a large amount of cash at hand, it may still make good business sense to consider some form of flexible commercial lending arrangements to maintain a positive credit rating and ensure
the cash flow keeps flowing.
Finance can often allow you to claim better tax deductions, whereas relying heavily on cash may leave you with less working capital to finance operations or explore new opportunities.