Why do businesses need finance?

Businesses need money for a huge variety of reasons, so cash shortages can cause serious problems. In these instances, a company might consider finance. In this context, finance means borrowing money through a traditional bank loan or an alternative agreement.

Finance can be a hugely useful resource for a small business. In this article, we’ll look at why you might want to borrow finance. We’ll cover a variety of situations, including:

• Startup costs
• Expansion
• Product development
• Purchasing capital assets
• Running costs

One of the most common business-related reasons for taking out a loan is to start a company in the first place. Budgeting for starting a business is a big project, as getting the ball rolling on a startup requires a lot of cash. For example, you might need money to buy inventory, property or to invest in marketing. You may also need a loan to pay for the company’s running costs, as it may be some time before your sales revenue is high enough to cover these.

If you don’t have enough cash to pay for all these, you might want to use business finance. Banks often offer loans specifically for people intending to create startups, but you’ll need to have a high-quality business plan if you want your loan application to be accepted.

Business development is a primary goal of many startups, as expanding and developing the business often means more opportunities, contacts, and income. Expansion is expensive, though, so if your business doesn’t have enough money, you may want to consider funding any business development using finance.  

Expansion can refer to many different large purchases or investments. It may be that you’re expanding your workforce, and the finance is necessary to pay the costs of hiring your first employee. 

Or you could be expanding your business operations — this would mean increasing production or providing your services to a larger area. To expand your business operations, you might need finance to buy new equipment, software, or vehicles for your company.

Regardless of the way you choose to expand your business, it will cost money. Borrowing finance for expansion can be an excellent idea because your expanded business will likely make more money, and you should be able to repay your loan quickly if all goes well. 

Say you’re seeing a lot of success with the main product your business sells, and you’re looking to create multiple different versions of that product to increase your sales and enlarge your market. You might want to consider using finance so that you can afford to develop the new product.

While you might be able to fund product development solely using your sales revenue, there are two distinct advantages to using finance. 

First, you’ll not need to spend as much time budgeting and diverting funds from other departments within your company if you use finance. You may need to spend time identifying a source of finance if you don’t have one, but the overall amount of time you save can cancel this out.

The other benefit of using finance to fund your product development is that it increases your production potential. Once you have your final design, finance can allow you to produce the product on a much larger scale than you may have been able to do if you had to rely solely on your own money. 

A capital asset (or fixed asset) is something your business owns, uses, and continues to use regularly for longer than a year. That means that capital assets are things like buildings, equipment, vehicles, and computers. 

Capital assets are also identifiable by their cost. Any single item that costs £600-£1000 to buy is likely to be a capital asset for a small business. For larger businesses, this sum would also be larger. 

Since capital assets are costly, you may not be able to afford them with your business income alone. That said, new capital assets can have an enormously positive effect, increasing your production, sales, and efficiency. This means that it may be worth securing a loan so that you can buy an asset that will improve your business.

You may need finance simply to make ends meet. Every business has expenses, and if you’re unable to afford your monthly running costs, you might want to borrow money so that you can keep your company going. 

This is a particularly good idea if your cash shortage is a short-term problem, and you’re expecting sales to return to normal (or improve) very soon. You can use the loan to keep the lights on, then pay everything off once your cash flow stabilises.

Your running costs could be anything from your rent and energy bills to the price of restocking your inventory. Running costs are the things you need to pay to keep your business from collapsing, so taking out a loan to pay these costs can be well worth the price of any repayments or interest charges.

If you find a source of finance for your business, you’ll need to keep a close eye on your money to make sure you’re spending your loan wisely. A good way to ensure you have a record of every transaction you make is to apply for a business account. A great example of a handy, easy-to-use business account is Countingup. 

Countingup is the business current account with built-in accounting software that allows you to manage all your financial data in one place. With features like automatic expense categorisation, invoicing on the go, receipt capture tools, tax estimates, and cash flow insights, you can confidently keep on top of your business finances wherever you are. 

You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Seamless, simple, and straightforward! 

Find out more here.