All Small Business Financing requirements are fulfilled from one or more of 5 different sources.It usually takes the owner(s) of the business to invest their own capital, before any of the others can be made to happen.
1. Investment Capital from yourself, family or more formal investors such as business angels or shareholders.
2. Small Business Loans from any traditional financial lender – comes in a number of different formats.
3. A loan from a Peer to Peer lending organisation.
4. Proceeds from Small Business Start Up Grants or any of the other kinds of Small Business Grants
5. Profits of the business.
Key small business financing concepts
If you intend to use any funds raised for a long duration (e.g. purchase of property), then you should match funding to a source that will last the same duration (e.g. Commercial Mortage)
Aim to raise your sources of finance in a balanced way using a combination of business finance products and providers to reduce risk and avoid endangering the long term viability of the business
Your business plan (and your current trading performance) will help you determine the amount of funding you need, and where it should be applied.
It is important to look at your cash forecasts, and decide whether you will have enough resources, or whether you will need to raise more. Don’t forget to build in a contingency for unforeseen circumstances.
If you decide you need further finance, start looking well in advance. Not only does this give the impression that you are in control and organised (because you are!), it avoids the stress and ultimately loss of control should the business get into difficulty.
It is also possible for your business to be adequately financed, but be in difficulties as a result of poor short term access to cash.
The 5 major and escalating symptoms of insufficient liquidity in your business
- The bank balance is in a continuous trend of decline.
- The number of days it takes to collect money from Customers starts rising. Here’s how to compute debtor days
- You will be unable to pay suppliers you owe money to on time. Some of them might stop delivering supplies to you until you pay what you owe. This can cause severe operational problems. For example if you can’t pay for goods that are required to fulfil orders!
- In more chronic cases you will be struggling to pay essential creditors, such as wages tax and sales tax or VAT on time. These kind of creditors are governments, and will not accept this. At this stage your business may be in jeopardy.
- The end of the line is usually the inability to pay wages on time or if a supplier presents a court order to wind up your business.
The main difficulty if your business is in or gets to this situation is your loss of control as owner. If you recognise any of these symptoms in your business you must investigate and take action immediately. By having appropriate working capital management in place you can take preventative rather than corrective action.
The situation of inadequate liquidity is known as over trading. The causes can be as a result of negative events, such as continuing losses, the insolvency of a sizeable debtor, or over indebtedness, but they can also be caused by expanding too fast. Expanding too fast requires working capital to be added to the business. More than can be supplied by the profits of the business alone. Here’s how to compute the working capital ratio to establish how much you need.
Prevention is always better than cure, It is therefore best to install early warning systems by using your accounting software and management information reports to prevent the situation developing as far as this.
Calculate how fast your business can expand without the need for extra funding. And be sure to start sourcing extra finance if growth exceeds this limit.