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.