Without sufficient finance, no business can survive. It’s for this reason that many apply for external funding from outside investors and lenders, or to family and friends with spare cash available to make a good idea into a reality. We can break down this fundamental need for cash into several common reasons, which motivate the vast majority of finance-seekers.
Cash Flow Problems
You can think of cash as the oil that allows the engine of your business to smoothly tick over. Without it, your business will grind to a halt, and potentially degrade itself in the process. If you don’t have the necessary funds available to pay your staff, or to pay your suppliers, then you might find that they withdraw their labour and goods respectively. This can rapidly create a negative spiral, where one problem quickly begets another.
Cash flow problems often result from an inability to get debtors to pay promptly. For this reason, it’s important to not only address the problem through borrowing, but to make procedural changes that will ensure that the problem does not develop again. So for example, you might have a fixed set of actions used to escalate late payments, or a more stringent set of terms and conditions.
If your business is to expand, you may need to make the investment in new facilities and premises. Where these improvements are going to improve productivity and profitability, it’s worth spending a little extra on interest in order to bring forward the purchase. For example, if you know that making improvements to your computer system is going to yield substantial improvements, it doesn’t make sense to wait and try to save money for it – if you haven’t made the necessary investments, then you might not generate that money anywhere near as quickly. Acquiring funding will allow you to fulfil your plans for improvements.
If you’ve got many existing debts to many debtors, then you might be able to make it more manageable and affordable to owe to a single lender. This can be a sensible way to escape a cycle of punitive interest, and to escape a hole that you’ve dug for yourself. If you’re thinking about restructuring your debts, it might be worth talking to an outside expert who’ll be able to identify an optimal solution.
Launching Businesses and Products
When a business is young and relatively unknown, the biggest barrier to profitability can be a lack of awareness among would-be consumers. Investing in a big marketing push can help to generate excitement and hype. This is particularly important during the launch of a new business, or a new product.
Before investing, many traditional finance-providers will want to see proof that they’re going to get a return. This is where a detailed and exhaustive business plan can be worth the time it takes to type it up.