The Nuts And Bolts Of Financing Your New Business – How To Use Funding Wisely

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Financing Your New Business
Image Soure: Unsplash

Whether you are considering launching your own business, or you have already built up an enterprise and are now in need of some extra funds to help it grow, you are probably wondering which financial option is the best for you. You may also be in need of some helpful advice as to how to most effectively allocate the funds when you receive them. Being responsible for the financial decisions involved in running a business can be a daunting task, especially if you don’t have much experience. To provide you with some of the guidance and support you may be in need of right now, here are some top tips to guide you on your funding journey.

Not only will you discover the diverse business funding options available (from the traditional to the unorthodox) which can help you gain an extra injection of much-needed cash, but you will also learn how to make the most of your funding when it enters your business bank account. Let’s get started!

Why Your Business May Require Some Extra Funds

First things first, let’s explore some of the most common reasons why businesses such as yours may be in need of funding at some point in their lifetime. After all, it’s hardly an irregular occurrence; in fact, the British Business Bank Survey carried out in 2019, revealed that over 40% of SMEs had applied for external funding at some point during the preceding three years.

Working Capital:

The most commonly cited reason for their funding search was a need for sufficient working capital to help them fuel the growth of their business. Having enough working capital is crucial for any kind of business, and if they don’t currently have enough capital in their coffers then a loan or some other similar type of funding is the obvious next step.

Startup Funds:

Many businesses require external funding right at the very beginning, to help them get off the ground. As you probably already know, launching a small business of your own can be costly, particularly in those initial stages when your enterprise needs to find its feet and secure a place in the market. 

Fortunately, there are a variety of startup funding options that fledgling businesses can tap into, ranging from angel investing to government grants, or perhaps even a crowdfunding campaign.

Asset Purchase:

Another common trigger for businesses to seek additional funds is the need to purchase assets that are essential to the growth and effective management of their business. Certain assets, such as specialized equipment or machinery, can prove to be very costly, so if a business doesn’t have enough capital to cover the price tag, an external cash injection is the ideal solution. They can then repay the loan over the next few years, depending on the specific terms of their agreement.

Traditional Funding Options For Your Business

Whatever the reasons behind your need for external funding, there are a plethora of avenues for you to consider pursuing. Many businesses opt to go down the traditional route of seeking a business loan, or applying for a government grant, although not all businesses will be accepted.

If you decide that you would like to apply for a business loan to gain access to a fast and convenient cash boost, there are different types of loan for you to consider. These include secured loans, unsecured loans, and a merchant cash advance, which you can obtain with the help of a dedicated online business finance platform such as Capalona.

Understanding The Fine Print

Each of the types of loans mentioned above is rather different and comes with its own pros and cons to mull over, so it’s important that you do your homework to work out which one – if any – will be the best option for you and your business.

For instance, secured business loans require you to put up a business asset as collateral, in case you can’t make a loan repayment. While there are benefits to secured loans (such as the speed and ease of getting one) there are also some obvious risks involved in taking out this kind of loan – not least, the chance of losing whatever it is that you have chosen to use as collateral.

Unsecured loans, as the name suggests, don’t require any collateral, so you won’t have to worry about losing a substantial asset. However, if you make your loan repayments late, or if you miss payments, then your credit score will plummet as a result, and this can make it much more difficult for you to apply for another loan in the future – for example, if you wanted to take out a mortgage on a new house.

As for merchant cash advances, this is a flexible form of funding for businesses that allows them to gain instant access to the money they need, and in return the business pays it back over the coming months, using a certain percentage of their future sales. Merchant cash advances can range widely in the amount of money you can receive, depending on the lender, but in general, it is possible to receive anywhere from £30,000 to over £200,000.

If you’re looking to buy funding data to assess the success rates of various traditional funding options, you can find valuable insights to inform your decision-making process.

Alternative Forms Of Funding To Explore

If you would rather pursue an alternative funding route than the traditional bank loans – or if it becomes a necessity, perhaps because you are finding it hard to qualify for a loan – then there are a number of options for you to think about.

Crowdfunding

Crowdfunding has been responsible for the success of a number of well-known businesses in the UK, including Brewdog and Pebble Time. Of course, as with any form of lending, there are both benefits and downsides, but if done correctly, it can provide a highly beneficial form of financial support for your business.

Crowdfunding can also help to give you a motivating source of camaraderie and community, as there will be so many voluntary ‘investors’ behind you, rooting for your business to succeed.

Another benefit of crowdfunding is that you may not even have to pay the money back directly; instead, you can offer other benefits, such as free products or services as a reward for your backers’ contributions.

Venture Capital

Venture capital is an option you might want to pursue if you are looking for long-term funding in exchange for offering equity in your company. This kind of funding is usually provided by a specially created financial ‘pool’, contributed to by various wealthy figures.

The benefits of venture capital are similar to crowdfunding; you don’t have to pay any interest, and, depending on the terms of your agreement, you probably won’t have to pay back the money you are given.

Angel Investors

If you believe that your business has what it takes to succeed and acquire a substantial turnover in time, then you may want to seek financial assistance from an angel investor. These wealthy entrepreneurs are always on the lookout for a viable investment opportunity – but they won’t just be providing you with the cash you need to grow your business, they will also probably be keen to take on a hands-on role, mentoring you and helping you to get in contact with helpful connections. This makes angel investors a particularly appealing prospect for many businesses; however, you need to have what it takes to attract an angel in the first place, and this includes honing a stand-out pitch that will prove appealing and prompt them to want to invest in your company.

Making The Most Of Your New Funds

Whichever funding avenue you decide to pursue, there will be hard work and plenty of effort involved in securing the amount that you need for your business. However, once you’ve acquired the money, the difficulties don’t end there, as you need to make sure you use your funds wisely.

This might sound like a no-brainer, but the reality is that suddenly gaining access to a substantial amount of money is enough to turn many people’s heads. As a result, it can be tempting to go on a spending spree to acquire all of the assets you think your business can’t do without. Then, before you know it, you will have plowed through your new funds and you may not have enough to pay for the things that you actually need; such as getting rid of debt, investing in a new piece of crucial equipment, or hiring new essential staff members to help your company grow.

Some of the smartest ways to make the most of your funding, once you’ve got it, include:

Consolidating Any Debt

If you have any debts hanging over your head, it’s a good idea to pay those off once you have your funding.

Covering The Costs Of Your Daily Operations

Instead of splurging on new company cars or trying out some new products, in many cases it may be wisest to use your new funds to finance the daily running of your business, to help give yourself a firm foundation from which to grow.

Adding To Your Inventory

Many business owners use their externally acquired funds to expand their inventory. Not only can they replenish any depleted stock, but they can also invest in a new product line that is likely to prove popular.

In Conclusion

Many businesses need a helping hand at some point in their existence, whether it’s right at the beginning, or in order to expand their horizons. Fortunately, as you can see, there are plenty of funding options available; the key is to make sure that you use those funds wisely once you have them.

By following the right procedures, finding the right investors, and making carefully considered choices, you could take your business to a whole new level within the next couple of years.