Why Do Businesses Need Finance?
There is no one answer to why businesses need finance. Growth, expansion, seasonal trading and getting your enterprise off the ground are just some of the reasons why you might look to get funding from an outside source. Here, we explore the many scenarios where finance could support your business.
Money makes the world go round. And sometimes you might not have enough of it immediately available for you to do the things you want, or need, to do.
That’s just as true of your business as it is in other areas of your life. In those instances, you may need to secure finance, and in this case, business finance. Raising these funds can take many forms, from securing a business loan, to accessing a grant, to selling a stake in your organisation.
But why do businesses need finance? What do they use it for? Here, we take a look at the various situations that might prompt you to seek out business finance.
What is business finance?
Business finance is the umbrella term for a selection of tools through which you can get the money needed to meet your business goals or cover your operational costs.
Traditionally, business finance can be split into two general categories, each with their own specific processes for raising funds.
- Debt finance: You borrow money that is then paid back, usually with interest.
- Equity finance: You sell a stake, or shares, in your company in exchange for funds.
There are other forms of finance, however, that aren’t captured by those categories, such as business grants.
Reasons why businesses need finance
Business finance can have negative connotations. The idea that you would only apply for a loan, for example, if your business was in financial difficulty. However, there are a range of reasons why businesses need finance, which can include growing and strengthening your organisation.
Below are some examples of when and why a business might need finance.
Getting a business of the ground
Few people will have the money they need to get their business off the ground without a little help. Although there certainly are businesses you can start without any money, many will require a cash injection from an outside source to get started.
That could be some assistance from friends or family, a grant for new businesses, or a specific start up business loan.
» COMPARE: Start up loans & finance
Exploring a new product or service
If your business is already established, you may look to develop a new product or service to take your organisation to the next level. Specific government grants exist for research and development, while a business loan could give you the money you need to start production.
» MORE: How to grow your business
Expanding into a new market
Say you are a retailer that sells their products locally. The next stage of growth might be selling those products in a new area or market. Business finance can give you the money needed to do just that.
Your local government body may even offer dedicated business loans in your area, so it is always worth doing your research.
Hiring more staff
As you scale up your business, you might need more hands on deck to help run things. But hiring new employees costs money. Business finance can help cover the initial outlay, though you should make sure you can afford the long-term costs of hiring more workers before doing so.
It is also important to note that if you hire anyone based in the UK that isn’t a family member, you are legally required to take out employers’ liability insurance.
» COMPARE: Employers’ liability insurance
There might come a time when your business needs to purchase specialist equipment in order to function, grow or expand. Certain types of business finance exist for just this reason, such as asset finance.
» COMPARE: Asset financing
Buying business premises
One way a business might need to grow is by buying a dedicated property to work from. That could be a shop, a restaurant, an office, or any of a whole host of other commercial properties.To do so, you would likely need to apply for a commercial mortgage.
» COMPARE: Commercial mortgages
Buying another business
There are a number of reasons why you might want to buy another business, whether that’s expanding into a new market, capturing a new audience, or developing an existing brand.
Regardless, you may need financial help to do so. Business purchase loans can be used to facilitate buying a pre-existing business.
Covering cash flow problems
There may be times where the numbers coming in, and the numbers going out, don’t match up. If you do encounter a cash flow problem, business finance can provide a short-term solution while you search for a longer-term fix.
» COMPARE: Working capital loans
Help with seasonal trading
Your business performance may ebb and flow based on seasonal trading. For example, a fish and chip shop on the coast might do better in the summer than winter, while the opposite may be true for certain clothing retailers.
Getting business finance to help with seasonal trading doesn’t just mean assistance when trading is light. It can help you buy extra stock, and hire more staff, to maximise those periods where sales are at their peak.
How to secure business finance
Before securing any form of business finance, it is important to do your research. Be mindful of:
- which type of business finance is right for your situation
- how much you need to borrow
- the interest rates, and other fees, attached to that borrowing beyond the amount you are asking for
- whether you can realistically afford any repayments
It is also a good idea to thoroughly compare business finance lenders to make sure you are getting the most suitable deal for your business.
» COMPARE: Business loans with NerdWallet
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Connor is a writer and spokesperson for NerdWallet. Previously at Spreadex, his market commentary has been quoted in the likes of the BBC, The Guardian, Evening Standard, Reuters and The Independent. Read more