For businesses to be able to run smoothly and efficiently, or even get off the ground in the first place, they need to have some sources of finance.
Consider a new business for instance there are a number of reasons why a firm like this will need to raise finance:
– A business that sells objects will need a stock of raw materials, so that they can manufacture and then sell their products. For example, a carpentry business will need a source of timber.
– Businesses will often need some sort of equipment for their business, especially if they need to manufacture products from raw materials. For example, a furniture manufacturer will need various pieces of machinery to make its products.
– A business will need to use some form of advertising or promotion, so that potential customers are made aware of it. Promotional campaigns can often be one of the largest expenses when a business starts up.
– Often businesses will need a vehicle for a number of purposes. This may be to deliver products or to visit suppliers.
– A lot of businesses will need to either rent or buy some building space to operate. This may be an office, a shop or a factory and will usually be quite expensive.
So how do companies raise these important funds I hear you ask, well – let’s find out!
Firstly a business can apply for a government grant. The government encourages entrepreneurs to set up new businesses, as this creates jobs which helps the national economy. Furthermore, each business must pay tax which gives the government money.
For this reason, the government will often award grants to businesses that it thinks will succeed and therefore create more jobs, especially in areas of high unemployment. However, part of the rules of a government grant is that businesses will often have to find funding equal to that of the grant.
Grants are often difficult to get as certain criteria have to be met to qualify for a grant. These may include the completion of forms, being interviewed, and even making certain promises, such as specifying the minimum number of jobs the business will create.
However, unlike loans, grants are interest-free and usually don’t have to be paid back. One example of a grant from the government is the Grant for Business Investment (GBI), which helps businesses to buy buildings and equipment. However, grants can also be obtained from the EU, charities and local governments.
Aside from a grant, the government also runs an organisation called Business Link. This organisation helps companies operating in the the UK and advises new and existing businesses, by showing them ways to become larger, more efficient and more competitive. This advice can include financial management, tax regulations, and employment assistance.
A business may also be able to make large amounts of money by selling off some of its assets (items that it owns). This can either be done by selling assets in exchange for cash, or by selling them and then leasing them back from the new owner, so that they retain use of that asset.
Like retained profits, selling assets can raise finance whilst avoiding interest payments. However, by selling an asset in either of the above ways, a business may either lose or must pay for the use of an asset that it needs in the future.
If a start-up company is still struggling to raise income there are ways to lower costs.
For instance a company could choose to hire machinery or other items rather than buying them outright.
Hire purchase and leasing are both effective sources of funding for businesses; however a business will be unable to use them to raise large amounts of funding. Leasing enables businesses to rent items such as vehicles or office space, meaning that a business can use such items without ever actually owning them.
Many businesses will often lease some form of equipment, and it holds the added advantage of being maintained by the business it is leased from. Hire purchase is a similar concept, whereby a business buys an originally leased item by paying for it in instalments. However, this can be quite expensive as the business will not completely own the item until all instalments have been paid.
On the other hand large businesses that are continuing to grow will also need to raise funds. When a business grows in size, it will still need to raise finance for a number of reasons, mainly to do with continuing the firm’s success. This may include developing new products, finding new ways of producing these, and also starting a new promotional campaign for either existing or new products.
Already successful businesses also use their retained profits as a source of income.
The profitability of a business is an important factor in dictating what it may use as a source of finance. For example, profitable businesses are more likely to be approved for a bank loan as they are more likely to be able to repay it.
Furthermore, a profitable business will be in a better position to use its retained profits, as it will have more money available.
Using retained profits is a smart move as a business does not pay interest like they would with a bank loan!
So whether you’re operating a big or small company, there is always a need for finance to help keep a business running, whether it’s for advertising, employees, premises, machinery, raw materials – the list goes on!