Business Finance
Introduction
to Business Finance
- all small businesses need business finance in order
to start up, invest for the future, as well as pay overheads on an ongoing
basis. It is becoming increasingly difficult for firms to obtain small business
loans, extend overdrafts, and obtain unsecured loans or commercial mortgages.
The profound effect of the liquidity crisis has forced many small firms to raise
business finance
from other sources such as credit unions, venture capitalists, and asset backed
leasing firms and by offering equity to potential shareholders.
Most business owners have to provide some form of
personal security to obtain business terms loans and overdraft facilities.
The lack of credit and problems of refinancing existing business debt have
become acute and have destroyed business confidence.
Small
Business Loans - most start-up entrepreneurs and existing businesses
have traditionally taken out a small business
loan
from their local retail high street bank. This type of business finance has usually been secured by a
personal written guarantee for the Director of the firm, normally against their
own home. Start-ups need to calculate how much business finance is
required to sustain them during the first difficult year of trading.
To help calculate this, an independent financial advisor may be able to provide
an unbiased opinion. As retail banks turn away many business loan application
requests, small firms can also look to commercial finance brokers as an
alternative source of business finance. Government attempts to underwrite
small business finance are also available, in the Small Fund's Loan Guarantee
Scheme.
Self
Employed Mortgages - there are other sources of business finance compared to
the traditional bank loan.
Some owners may choose to raise business finance through obtaining a self
employed
mortgage, sometimes referred to as a business mortgage,
self certification home loan mortgage or 'non status' cert mortgage.
These self employed (self cert) mortgage products were,
(and are still today), developed for self employed people, who could not easily
meet the traditional mortgage lending criteria, set out in most mortgage
application procedures.
Business
Grants - for many smaller start-up firms who have failed to secure business
finance form the traditional routes, obtaining a free business
grant
from the government is an attractive alternative.
All budding small business start-ups may be able to receive
financial help from their local district council or from central government.
Unlike loans and other forms of borrowing, grants are usually refunded.
It's a great way to raise badly needed cash. There are many types of grants
including research and development grants, skills based, matched funding grants
and regional enterprise initiatives.
All grants have eligibility criteria attached to them to
ensure that the money is invested wisely and meets the objectives of the scheme.
Small-business applicants must ensure that their small business grant
application meets those criteria in order to ensure the application is not
rejected.
Raising
Equity Capital - an alternative to borrowing money is to raise
equity capital in exchange for an equity stake in the company.
Equity capital is a method of raising business finance for long-term
growth, in exchange for an equity stake in the company. The main
purposes of raising
equity capital are usually to start up a new business, eliminate cash flow
problems (caused by existing business debt refinancing), buyout a business
partner or expand and grow organically. Private equity firms are
constantly seeking out investment opportunities in smaller companies.
Their cash investments come from larger institutional investors such as pension
funds and insurance companies. Equity may also be raised from business
angels or venture capitalists, who may take an active role in managing the
business to protect their initial investment. When offering shares to
investors, owners must produce a compelling investment plan, spelling out the
investment offer clearly and honestly.
Small
Business Banking - a logistical exercise for business start-ups in managing
their business finances, will be taking out a small business
bank account. Choosing a business banking provider involves comparing
the costs and benefits of each retail banks offerings. It can be difficult
to switch business bank accounts that have already been set up for a while, due
to the practical hassle and time wasting involved in switching direct debits,
standing orders, informing trade suppliers etc. Many business bank accounts also
provide the option of taking out the business credit card to assist in making
business purchases more convenient. While short-term cash flow and
convenience they be an obvious benefit, the interest rates on business credit
cards are notoriously high and need to be compared carefully.
Company
Taxation - one of the most important aspects of managing
business finance is to understand minimise the impact of company taxation.
Everybody hates tax, yet we all accept that the country needs to fund its
spending priorities through the tax system. Entrepreneurs need to choose the
appropriate company structure during the start-up phase and then ensure they
have a clear understanding of the
company tax
implications. There are many practical business finance issues such as
dealing with dividend payments, Capital Gains, VAT, PAYE, National Insurance
Contributions, bookkeeping, corporation tax and annual submissions to Companies
House. Most limited liability companies entrust the majority of these
types of issues to their accountants. In particular, many small firms have their
own pension schemes set up for their employees. Other business owners have
chosen to use a tax efficient self invested pension scheme to run alongside
their remuneration package, choosing to sacrifice some of their own company
salary for pension contribution instalments. These longer-term business
finance investment decisions require qualified and specialist advice and
guidance, with regards to retirement planning and changes to the taxation
system.
Small
Business Accounting - many small firms use accounting software or
third-party accounting services to manage their business finances effectively.
An accountant will provide professional and regulated advice on accounting
compliance such as profit and loss and balance sheet submissions.
Equally as important, accountants can assist you in understand how well your
business is doing from a financial perspective. In addition,
all small businesses require reliable management information systems to make
decisions in order to make effective management decisions as well as demonstrate
accountability to third parties for regulatory purposes. In
order to obtain management information, owners need simple and easy to manage
bookkeeping and small
business accounting processes. This does not necessarily mean that
expensive and difficult to understand accounting software is required during the
company formation stage. For most entrepreneurs, accounting and bookkeeping is
dull, boring, tedious and time-consuming. Yet the information that can be
gleaned from day-to-day receipts, invoices, bank statements and so on, is
critical in summarising current and future business performance.
Cashflow
Management - the positive flow of cash through any small
business is the lifeblood of survival; business suppliers and employees
expect payment on time while customers are increasingly interested in
interest free offers and favourable credit terms themselves. The main cash
outflows are purchasing of stock and raw materials, general operating expenses,
salaries, company tax, directors divides and creditor loan repayments.
Therefore, the importance of
cash flow management and forecasting is becoming paramount for small
businesses struggling with volatile sales orders and shorter trade credit
periods.
Dealing
with The Economic Threats and Opportunities - much of firms ability to
obtain readily available and cheap business finance hinges upon the economic
conditions of the day. For instance, there are many inflationary pressures that
managers need to be mindful of the impact of
inflation in the context of small business investment decision-making.
Inflation is a macro economic term used to describe the general level of all
prices of products and services over a given period of time. In the United
Kingdom it is generally measured using the Consumer Price Index (CPI) and
expressed as a percentage. Likewise, the prevailing
interest rate
impacts the cost of business finance.
For many small business owners and
individuals, types of interest rates can sometimes be confusing and difficult to
calculate. Financial services organisations
present business finance offers in their best light using varying interest rate
claculati0on methods. Similarly, the
credit crunch is
now a globally recognised term to describe an increase in the cost of borrowing,
coupled with a reduction in availability of financial credit to businesses and
individuals. Organisations, previously reliant on easily available overdrafts,
bank loans and unsecured credit, are now struggling to raise working capital,
manage cash flow and hold down operating expenses. The credit crunch is having a
profound effect not just on Governments spending, Banking Institutions and
consumers, but also on entrepreneurs and small business owners.