Why Do Business Owners Need To Borrow? – Part 1
Why do business owners need to raise finance? What are the common reasons why small and medium sized enterprises (SME’s) borrow money?
In a survey carried out last year, the British Business Bank discovered that 60% of SME businesses (small and medium sized enterprises are defined as businesses with between 0 and 249 employees) sought some form of external funding at some point over the previous three years.
Whilst businesses need finance for a variety of different purposes, there are some common reasons why most businesses apply for funding.
And the 5 most common reasons are these:
- Working capital
- Asset purchase
- Starting a business
- Refinance of existing debt
I’ll examine the first three reasons this week and the remaining two in next week’s blog. Let’s go through them one at a time.
- Working capital:
Cash flow is crucial to the existence of any business, small, medium or large.
As a result, ensuring the business has sufficient working capital, is vital for any company’s financial health. And it is also the most common reason for SME businesses to seek funding.
And of course, not having enough working capital can have a serious impact on both the business and its survival.
Within the category of working capital, the survey by the British Business Bank discovered that the main reasons why a business needed working capital could be broken down as follows:
- 51% to cover a short-term funding gap
- 33% to fund general growth
- 33% as a safety net
- 24% to cover an unexpected expense
What’s interesting in these numbers from the British Business Bank, is that two of the main reasons – a short term funding gap and unexpected expenses – are all about cash flow or the lack thereof.
Sufficient working capital is therefore crucial for a business.
2. Asset Purchase:
Growing your business and increasing sales often requires the purchase of new assets such as machinery, IT, furniture, plant and equipment or vehicles.
Whilst there may be sufficient cash within the business to cover working capital, when it comes to buying new or additional assets, you may have to consider a loan to meet the purchase costs of that new asset.
A loan specifically designed to assist with the purchase of assets may be exactly what you need to cover the costs of your expansion plans. Of course, an asset loan can be used to assist with the acquisition of a variety of different types of assets including vehicles, furniture, IT systems, phone systems and plant and equipment.
Therefore, asset finance can play a big part in helping a business to grow.
3. Starting a business:
Businesses need funding to get started. And in that initial trading period, the business is often self-funded by the business owner, or perhaps with the help of family and friends.
These are probably the most common ways of funding a business in the start-up phase, because, whilst start-up business loans are available, they can be difficult to obtain.
As a result, self-funding the new business or asking family or friends to help out is a common way of ensuring the business has enough funds to ‘get off the ground’ during the early stages of trading.
In next week’s blog, I’ll look in more detail at the other two common reasons why businesses borrow – expansion and refinance of existing debt.
In the meantime if you would like to talk to us about raising finance for your business, then email us at email@example.com or give us a call on 020 8949 2122 and let’s see how we can help.