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Borrow from external lenders predominantly financial institutions or other organisations
At a certain stage, almost every business will require capital or credit in order to reach the next level. If you are looking at acquiring new assets or taking on a significant project with large expenses, it is probably time to explore your financing options. As with all financial matters, it is vital you involve your accountant and your bookkeeper to ensure that whatever you choose is appropriate and will not negatively impact your business down the line. If you are looking at acquiring a business, new property or other assets with the financing you are seeking, you will also need to ensure you have done your due diligence to protect yourself.
What type of financing do you need?
The type of financing which is right for you will depend on your current business position and the purpose of the financing. There are two main types of business finance:
Discussing your needs with your accountant is the best way to determine which type of financing you need and where you should go to get it, but there are a few questions you can ask yourself first to get started:
If you are seeking funds to acquire assets which will increase your earning potential and productivity, debt finance can be a great way to do so without sacrificing control of your business. While the debt will incur interest, your increased income should be able to cover the repayments while still generating a profit overall. The downside of this is that the repayments may impact your cashflow, which could reduce your organisational agility and flexibility down the line. When you are seeking a business loan, you can consult with a certified finance broker to find the best terms for you.
If you are seeking funds for a less predictable means of improving your business, such as R&D or marketing, then it may not be wise to lock yourself into a fixed loan. When there is an element of risk, it is better to seek equity finance and trade away a share of the business to investors in order to acquire funds. In these instances, the investors are taking on the risk for you so that they can share in your profits down the line. If you are looking for investments, you may turn to a venture capital or angel investment firm or else you may seek out private investors directly.
There are some common pitfalls when it comes to seeking financing, but if you follow these tips and consult with your accountant and lawyer prior to signing anything you should be fine: