Category: Cash Flow

This is often one of the biggest hurdles that growing businesses face, raising cash. You’ve increased your sales to maximum capacity, you’ve got a team and processes in place but you can’t plan for further growth without further financial investment.

It’s a great position to be in but you need to consider your options for funding.

Firstly, be sure of what you’re setting out to achieve. Have a clear plan in place and clearly define your goals:

• What’s your action plan for the next 12 months?
• The next three years?
• The next five years?
• How much cash do you need for each of the above stages?

There are several different approaches to guiding your business to the next level. Here we list some potential options for consideration:

Personal Funding

The quickest and easiest way to raise finance is often to utilise personal savings. The disadvantage is that the amount of funds may be limited and insufficient to fund the level of growth required. Also, there may be a level of risk with no guarantee that the company will be able to repay those funds. Raising money from friends and family is also another option but again there is a level of risk and no guarantee that the money will ever be returned which can lead to strained relationships.

There are then only two other options – Equity or Debt.

Equity

Equity means you are looking for investor to give you money, in exchange for a stake in your business. 

The benefit of raising cash this way is that it doesn’t need to be repaid and you may get to benefit from an investor with extremely valuable experience which will help the business grow in the direction you want it to. However, you’re also giving away a portion of your business which means you will have less control so it’s important to make sure you choose the right investor. 

Here are some examples of equity investments:

Private Equity – investors who provided cash to established businesses in return for a large or controlling stake, to help them grow to the next level.

Corporate Venture Capital – an investment made by a large company into a smaller business, in return for a share of that business.

Expansion Capital firms – give established businesses money to grow and reach maturity.

Angel Investors – act as mentors and invest their own money in early-stage businesses for a share in the company.

Venture Capital – invest in businesses with high growth potential, often after Angel investors have got the business started. The money comes from established entrepreneurs, investment banks and other financial institutions.

Crowdfunding – Using an online platform, investors buy shares in a company to help it grow.

Debt

Debt financing means you are borrowing money that needs to be repaid, usually with interest being paid on the amount you borrow.

Debt is often a scary word and managing any borrowing needs to be done carefully when looking at raising cash. Some debt is straight forward and short-term. Other debt is longer term. This is why you need to be clear of the purpose for your lending requirements. 

Always consider all the options and think ahead to your 5 year plan. Raising equity can be complex and is a lengthy process. Make sure you have sufficient cash to meet your plans. Having a strong financial business model and cashflow plan is essential. 

Here are some debt options for consideration:

Overdraft – short term lending, typically from a compay’s bank and up to an agreed limit. Overdrafts can be expensive but a business will only pay interest on the amount they actually borrow.

Credit cards – another short term option and easily accessible but usually with a high interest rate.

Invoice factoring – selling your unpaid sales invoices to a third party who will collect the debt from your customer, paying you a percentage of the invoice value up front, minus their fee. A fairly expensive option but useful if you have a large amount of outstanding invoices with slow payers.

Asset financing – raising funds to purchase physical assets such as vehicles and equipment. A fairly quick form of finance, also giving the lender tangible assets to recover should you default on the repayments. Useful for asset intensive businesses with the option to consider refinancing the assets and releasing cash to the business. 

Supplier Credit terms – often overlooked as a form of financing and another short term option. Negotiating extended credit terms with your key suppliers can free up working capital. 

Business loans – borrowing money from a loan provider such as a bank and then paying it back with interest over an agreed period. Loans can be both short-term and long-term. There are also various Government backed loan schemes such as the Recovery Loan Scheme and start-up loans.

Peer to Peer Lending – a business borrows money through an online platform and pays it back with interest over an agreed period.

Direct lending funding – A business borrows money from a fund and repays it with interest. A fund may be able to provide loans where a bank will not.

There is also one other option – Grant Funding. A Grant is a non-repayable type of funding, usually awarded by governments, organisations, or companies to invest in certain assets or activities, or to help a business achieve a particular goal.

Exactly what level of debt is suitable for your business depends on your precise requirements at any one time. Whatever level of debt you undertake, it’s important to measure it. Keep track of your level of gearing and monitor your debt to equity ratio – a simple formula to show how capital has been raised to run a business. This is an important financial metric because it indicates how financially stable a company is when facing problems with trading or other operational considerations and what ability it has to raise additional capital for growth.

How an accountant can help you

There are a number of ways in which a qualified accountant can help make your business more efficient, especially when it comes to managing your debt. Every business is different but monitoring cash and debt, is equally as important as measuring profit. 

An accountant can support you in creating a cashflow forecast to make sure you’re in good cash health and by spotting any potential cash shortfalls early on. You also need to understand what you owe as well as what cash you have in the bank. Looking at your bank balance every day won’t tell you all you need to know.

Based in the Heart of Evesham, The Accountancy Office are here to help If you wish to discuss any aspect covered in this article please don’t hesitate to call 01386 366741 or email us here.