BUSINESS FUNDING: Using finance to stimulate business growth is one of the common ways to expand a commercial operation.
As a rule, you would need to invest more money into a small business to increase sales or improve profitability.
There are several ways to fund an expanding venture, such as:
- Investing some of the profits back into the operation.
- Selling shares to outside investors.
- Taking out a business loan.
- Using other growth funding models (e.g. government-backed schemes).
Note: Certain types of venture capital schemes (VC) would suit certain kinds of emerging businesses better than others. The business support helpline offers free advice over the phone for people setting up or running a small firm.
Taking on a loan or an investment needs to make financial sense. So, you may need the services of a professional adviser to help you work out a strategy (e.g. a chartered accountant).
You can search an online directory to find a chartered accountant on the Institute of Chartered Accountants site (ICAEW). The Law Society website provides further information about solicitors on their official database of legal professionals.
There are several valid reasons why the owner of a company might consider financing business growth. Some of the most common reasons to get a cash injection would be to:
- Acquire or purchase new machinery or equipment.
- Expand into new commercial premises.
- Increase annual turnover.
- Take advantage of upcoming growth opportunities in the market or industry.
Note: Always consider getting legal advice before taking on new investments in a commercial operation. Writing a professional business plan can also help you attract investment and funding.
Selling Shares to Investors
Bringing in new investors is one of the ways to finance a small business in the United Kingdom. Potential investors will want to know several key factors about the company. Of most importance will be how much the business may increase in value if they decide to buy shares.
They would need some information from you to work out the value. In simple terms, you would need to show how much their investment is going to increase business sales and profitability.
Thus, you would need to provide a financial model to any potential lenders and investors that shows:
- Exactly how the business will spend the extra funding. How is the money going to increase future sales and profitability.
- How the initial costs, along with any subsequent increased ongoing costs, are going to affect business cash flow.
There will always be some initial costs to set up a business, no matter how small. As a rule, sales increases only come to fruition after incurring some extra costs, such as when:
- Employing additional staff members.
- Moving to larger or specialised premises.
- Putting in bigger orders for extra stock or raw materials.
As the owner of the company, you would need to take things such as these into account when you set out your financial planning.
Taking Out a Business Loan
Taking out a business growth loan can help you seize new opportunities if and when they arise. But, pouncing on new markets means you may need access to some extra capital or upfront deposits.
Acquiring extra funds can help you pay for future plans to become a reality. For example, it could help the firm put in a tender for a huge contract and move up to the next level. It could help you build the technology needed to increase performance levels.
Paying Back Business Loans
There is one downside of getting extra funding to finance a small business expansion. The business will need to pay back the debt. You must make sure you can repay a loan before taking it out.
As a rule, you will be making the repayments in instalments paid out over several years. Remember you would also be liable for paying off interest on any outstanding debts.
It can become a little more complex if you set up as a sole trader and looking to get a business loan. In this case, you may need to provide a personal guarantee to any potential lenders. You may need to promise to hand over certain assets (e.g. your car or home) if you are unable to repay the loan.