Why Do Businesses Need Finance?

In order to achieve your business goals, you may choose to acquire business finance to make it a reality. From employing new staff, providing quality services, and producing goods for your clients, sufficient funds are required. A range of business finance solutions exist to help you grow your business, take advantage of opportunities, or manage potential risks; but with so many options available it can be hard to know how to choose the right option. So, where do you begin?

Global Marketing Research company, Ipsos, reported in a 2022-2023 survey, that 39% of SMEs applied for external financial support (down from 59% in 2021). Their report further continued to show that the greatest financial obstacle for SMEs was a “lack of awareness of funding opportunities available to them”.

In this article, we outline the different types of business activities that commonly require finance, some of the most common sources of finance, and what to consider when seeking a business finance solution that can expand your company’s growth.

Business activities that typically require finance

Businesses need finance for a variety of reasons. This can range from purchasing an asset, increasing working capital, funding a new startup or even buying a new business.

Acquiring business finance can develop your company in ways that are unachievable without it, in order to reach your business goals.

Examples of business activities that typically require finance include:

• Asset purchases
• Business startup
• Working capital
• Growth funding

Asset purchases

Asset purchase finance enables you to borrow to pay for new machinery, vehicles and materials, in order to increase productivity and expand your business. This type of business finance allows you to spread the cost over a period of time.

For example, if you owned a painting and decorating business, the nature of your industry would require your staff to travel. Therefore, you would need to buy vehicles for your staff to use and transport their tools to jobs. The price of a new Ford Transit van can start from £28,145. Consequently, if you had to purchase multiple vans, the total cost could mount up to over £100,000. Business van finance may well be required to assist with the purchase of a new fleet of vehicles.

Asset finance allows you to break down the cost into manageable payments, whilst also helping you to retain ownership of the goods once fully paid for.

Business startup

As a startup business, you may require finance to keep your business going before you can generate successful profits. Even though you may have the funds to start your business, the ongoing costs could require you to seek business finance to achieve a good profit, in order to keep your company in business.

Research conducted by the financial technology company, Tide, showed that the average UK startup spends £22,756 in their first year. However, “Only 42.4% of SMEs survive past their first five years”, which is why some SMEs choose to take out a startup finance loan; this can be used for many reasons, such as hiring staff and buying stock.

Working capital

Adequate working capital is a critical aspect of financial management for businesses, regardless of the size or industry. It represents the funds available for day-to-day operations, helping you to plan for future needs. Not retaining enough working capital can have a dangerous impact on your financial losses, debts, and your company’s future.

Securing a loan to improve your working capital will allow you to bridge the gap between your income and expenditure, whilst the rest of your business’ finance runs smoothly. It is important to remember that if unforeseen circumstances do arise, having accessible funds to manage any crises will give you the funds you need to overcome most business obstacles.

For example, if you’ve owned a business for over five years, your cashflow forecast will have been significantly impacted by recent events, such as the COVID-19 pandemic. Not only that, but also the cost of living crisis affecting your company. Costs from these events are higher than once anticipated, creating a cashflow shortage and therefore, the potential need for a working capital loan.

Growth funding

Businesses seek growth funding to further expand their business, take advantage of opportunities, and achieve strategic goals.

For example, if you owned an e-commerce artisan pottery company, you might create a marketing campaign to generate sales. With more customers finding your business through the campaign, you would probably start to see an influx of orders. As demand for your products increases, you may want to use this as leverage to use growth funding for talent acquisition. By hiring employees, you are able to keep up with order demands and still maintain the excellent reputation your business is well-known for.

Sources of finance

Depending on the nature of your business, it can be tricky to understand the right type of finance for you.

Sources of finance can range from:

• Bank loans: a type of loan that businesses apply for via their bank, often based on a business plan. However, they can be difficult to get and interest rates tend to be high.
• Business angels: these are private investors who choose to invest their money into startup businesses in exchange for a share of the business; although you may have to release a portion of your ownership and decision-making to them for that funding.
• Crowdfunding: turning to the opportunistic public for contributions. However, you may fall short of the target goal, with many platforms refunding contributors if a target amount is not achieved.
• Family and friends: your closest relatives and friends may be able to lend you the money to get your business started, but if you are unable to make a success of your business, you have essentially lost their money.
• Government grants: a grant supplied from the government, which in most cases does not have to be repaid. These may have stringent eligibility criteria, and potential long approval timelines.
• Venture Capitalist (VC) funding: investment in a business, similar to how a business angel would. Venture Capitalists can give added advice and knowledge on making decisions. It is important to consider that there can be added pressure to grow, with your investor expecting high return on their investments.

Things to consider when looking for finance

Choosing the right business finance solution for your company can be an overwhelming task if you’re not sure where to begin.

Choosing the right finance solution is essential for you to maximise your chances of securing finance. An experienced finance broker will be happy to discuss your needs, support you with guidance, and provide you with their expertise in order to help you identify the best financial solution for your business.

Below are the essential questions you need to ask yourself when looking for business finance:

• How soon do you need the money?
• What are the potential risks before receiving a loan?
• How much do you need to borrow?
• How much can your business afford to borrow?
• What is your current gearing ratio?
• Is this for short-term or long-term use?
• Is it secured or unsecured finance?
• What are the interest rates?
• Does the lender have experience in your industry?
• What are the repayment options available?

For more information, take a look at our dedicated guide on things to consider when looking for business finance.

Need help securing finance for your business?

We understand that securing business finance is an important decision to make. Whether you require asset loans, working capital, startup, or growth funding, our expert advice is on hand to make sure you are making the right choice for your company.

We can guarantee:

• Easy application process
• Low rates
• Instant business loans - receive funds in as little as 48 hours

At Union Business Finance, we pride ourselves on:

• Transparent advice to help you make an informed decision
• Our expert knowledge; helping clients find the right financial opportunities
• Building trusted relationships that last a lifetime

For more information on which business finance solution is right for you, contact us today.