Business concern needs finance to meet their requirements in the economic world. Any kind of business activity depends on the finance. Hence, it is called as lifeblood of business organization. Whether the business concerns are big or small, they need finance to fulfill their business activities.No business, whether big, medium or small can be started without an adequate amount of finance. Right from the very beginning, i.e. conceiving an idea to business, finance is needed to promote or establish the business, acquire fixed assets, make investigations such as market surveys, etc., develop product, keep men and machine at work, encourages management to make progress and create values. Even an existing concern may require further finance for making improvement or expanding the business. Thus the importance of finance cannot be over-emphasized.

Should you use your own money, borrow from family and friends, or go straight to the bank? Understand the different forms of borrowing and choose the best financial option for your business.

How much do you need?

To work this out you need a business Plan. The business plan will help you work out your financial needs, including the initial start up costs and running expense. You can draw up a budget that shows your forecast sales, expenditure and – absolutely vital – your cash position for each month.

Consider possible peaks and troughs in the business (perhaps seasonal) and remember that many start-ups spend more than they earn in the first couple of years. Customers may not pay you immediately but you still have to pay all your bills to keep trading. Try to have at least enough capital to cover projected expenses for at least six months – the nature of your particular business may mean you need more.

Types of finance

Most new businesses use a mixture of finance - savings, borrowing from friends or family, personal loans and bank borrowing. Cash Credit, Overdrafts and Term Loans are popular. New start-ups can also apply for grants and lower interest. If you are short of cash at the outset you can consider leasing and hire purchase for vehicles and equipment, rather than buying. If your business has lots of unpaid invoices you may want to consider invoice financing. All methods of finance bring their own advantages and disadvantages and you should take advice before making a decision.

Using your own money

You will have to invest some of your own money if you want to interest a bank in giving you a loan. If you don’t have savings you might have to sell possessions or assets, or use money from friends and family. If you are relying on family and friends they should only invest amounts they can afford to lose and understand the risks. Have agreements put in writing. Generally, using unsecured loans or credit card borrowing for business start- ups is unwise and may end up crippling your business before it has a chance to get going.

Bank finance

It is increasingly difficult to borrow from banks – even with a good track record. Rates are high and banks are nervous about losing yet more money. So you will have to be a good risk before a bank will part with any cash. Before lending, a bank will want to see a credible business plan, evidence of a successful track record in business. You will have to offer security for any money lent (business assets or personal asset) and you will have to show commitment by investing your own money as well. Increasingly banks expect you to invest larger percentages of your own money before they will commit.

Overdrafts and Cash Credit

If for eg. a person is having a business. To carry on this business he needs to purchase raw material, and sell the goods. For this he needs working capital to run his daily business. These are very useful for financing temporary cash shortages and are generally a flexible way of funding day to day requirements. Interest is paid only on the amount you overdraw each day. But they have higher interest rates than loans, and exceeding your overdraft/cash credit limit is costly. In theory, the bank could demand repayment any time – even 24 hours notice.

Term Loans

Term Loans are often the best way to finance a longer term business needs. They are usually fixed for one to ten years (some loans may have a term as long as 25 years). Repayments are agreed in advance so at least you can match the term of a loan to your requirements and can budget for repayments. On the downside there is no flexibility.

Term Loan or Cash Credit

The bank liabilities should be appropriately backed by assets. If you plan to invest the money borrowed in fixed assets then Term Loan should be the choice of fund. Cash Credit/Overdrafts should be used only to acquire current assets or to settle day to day expenses of the business. Cash Credit/overdraft are short term sources of funds hence they must be invested in assets from which cash can be realized in short term to pay off such debts else there may be liquidity crunch.

Grants

Grants and government support may be available. You can get subsidised or low interest loans. Often support schemes provide lots of free advice you might otherwise have to pay for.

But there may be stiff competition, you will have to meet specific criteria and usually have to provide funds yourself. Grant applications can be time consuming.

Security for borrowings

For any type of borrowing you will need to show you can afford to pay it back and that you can offer security to ensure the loan is repaid if things go wrong. Security can take different forms. You might be able to offer:
 

Primary Securities - Banks have a charge on Assets which are acquired by making use of bank’s money. They serve as primary security to cover the banks advances.

Collateral Securities- In addition to primary securities banks generally ask for some additional security in the form of fixed assets or cash margin. These are known as collateral securities.

Guarantee-

• a personal guarantee from an individual (be aware that if the guarantee is called on and has been supported by a legal charge over your personal assets, these assets, including your house, can be at risk)

• a guarantee from a third party. This person will be liable for the debt if you default. Sole traders (and partners) are already personally liable for all business debts and directors of limited companies may have to provide personal guarantees in case the company fail.

Hence it is advisable to use only that form of finance which is most suitable in terms of availability, use, interest cost, flexibility and security.

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