You’ve probably heard it said that ‘cash is king’. For most small businesses, the phrase ‘cashflow is king’ would be more accurate. Without a healthy cashflow, a business can run into trouble fast, regardless of whether it’s making a profit on paper or not. If you’re a business owner, you’ll know that the initial stages of starting a new enterprise are the hardest.
During the first couple of years, there’s often barely enough money to keep the business in operation and pay the necessary outgoings, let alone think about expansion plans. As a result, many entrepreneurs seek additional financing to help them through these difficult early stages. Let’s take a look at the different ways you can make the best use of business finance to help you build on all that hard work and grow your company.
1) Examine all available options.
Seeking additional funds for your business might mean dipping into personal savings – perhaps a ‘nest egg’ you built up from your previous stint of employment – or extending the balance of available credit cards. Others prefer to ask friends or family to help with a loan, perhaps in exchange for a small piece of business equity. This is a great idea provided you’re confident about your business’ chances of success, but losing the precious savings of those closest to you if things go wrong could spell disaster for your relationships as well as your business.
Of course, business finance can also mean following a more formal path by applying for a loan from a bank or other lender. However, the strict criteria placed on borrowers by traditional lenders often rules out new startups and those without sufficient business capital.
2) Work out the best way to spend your extra money.
After you’ve found the best source of funding for your particular business needs, you’ll want to invest it wisely in order to get the best possible short and long-term return. At the very least, you’ll want to ensure that you generate enough profits from that money to comfortably repay both the original loan amount, and any interest accrued. One of the best ways to grow your business is to invest in technology or machinery that can speed up production and help reduce costs. Alternatively, use your extra business finance to build up a great team of employees that can bring fresh ideas and added value to the workplace.
3) Think big.
Many new business owners make the mistake of asking for the loan amount they think their lender is willing to give them, rather than the amount they actually need to put their growth plan into action. In fact, what lenders or investors will want to see is a realistic business plan, with a well-thought out growth strategy and concrete proposals to repay their investment, as well as provide them with a tidy profit. If you succeed in getting funds but they’re less than you really need to make your plan work, you’re simply creating more financial problems for yourself in the long run.
4) Look to the future.
While everyone – including your backers – will want to see your business turning a profit as quickly as possible, creating a successful strategy for long-term profitability is the only way to ensure your business is still around in five or ten years’ time. Therefore, try to strike a balance between short term gains that will keep investors and shareholders happy and a long term goal to build a successful and sustainable business. While external investors may encourage you to have an exit plan for selling your business if a strong enough return can be made by doing so, businesses that aren’t beholden to such backers may have more room to think of the long term future when mapping out their business growth.
Business finance is one of the best ways to provide your enterprise with a good headstart and ensure it can grow to fulfill its potential. The type of finance you seek will depend on what kind of business you are undertaking and how long you plan to trade. However, understanding the different business finance options available will help you make the best choice for your company and pave the way towards long term success.