Why not all business funding is equal and the costs of not getting it right

Hi, everyone. It’s Nishi here from N-Accounting and in today’s video, what I wanted to talk about is firstly raise awareness of the different types of funding available to a small business, and then talk about the pros and cons of the different methods. Well, firstly, let’s talk about why your business might need funding. If you’ve identified that you’re going to run our money at some stage, then what you need to do is find a way to plug that gap. Sometimes you can do that by growing your sales, sometimes you can do that by reducing your costs, but then sometimes you have to do that by getting external funding to flood at the business in periods of time where it doesn’t have enough cash. So this is what we are talking about today, the different kinds of funding available in those times.

So one thing that is so, so important whenever you’re thinking about funding is just to have some sort of cash system in place, and also a way to really look at head in terms of your cash flows. And the reason that is so important is because, firstly, you want to work and realize that you’re going to run our money in as far and advance as possible before you actually run our money and the reason for that is the closer you get to running out money, the harder is get for funding. The ironic thing about funding is people will typically only lend to you when you actually don’t need the money and then when you do need money, they won’t lend to you. So by just thinking ahead, like six months, a year, you can really increase your chances of getting that funding which will then increase the chances of your business actually surviving. So that’s really, really important to be able to look ahead.

And then that goes into the next thing, because if you’re thinking far enough ahead and you know when you’re going to run out of money and you know how long you’re going to run out of money for, then that can then steer the decision in terms of the type of funding you get. Because whether the gap in a cash flow is going to last a couple of months, or whether it’s going to last a year or a couple of years, that’s hugely important in terms of the type of funding you arrange. So I’ll start with some of the common ones and then we’ll go into some more obscure methods of funding of business.

So yeah, really the one most people heard about is loans and overdrafts. Overdrafts are expensive, but easy to arrange and they’re really good if you’ve just got really short gap in your funding requirements, because then you don’t have to spend ages and ages and ages applying for like a loan or other forms of funding. You just get that overdraft quickly, use it for a short period of time, you do pay a lot of interest, but because it’s such a short period of time, you don’t need to worry too much about it. And then you repay it and then you’re done and then your business then has a positive cashflow again. Loans, they typically are a bit more complex to arrange and they are done for a longer period of time because of that complexity to arrange. But because of that, the interest rate is usually quite a bit lower. So if you’ve identified quite a large gap in your cash flows, it doesn’t make sense to use an overdraft to fill that gap because you’re then going to be spending loads and loads of money in interest.

So that’s why you’ve got to understand loan, so short term borrowing or long term borrowing. Obviously everyone’s heard of the bounce back loan, that’s a great loan and unlike most loans, it’s cheap and easy. It was really easy to arrange, but you can’t really rely on another one of those coming along. So yeah, typically loans, they do take a bit more effort to arrange. So some of the other types of funding, you’ve got invoice financing, very, very, very expensive, but typically you can borrow a lot more than you would via loan and they tend to lend to riskier business as well. So the way invoice financing works is essentially a third party is buying your debt off you, so they buy your invoice is off you, forward you 80% of that up front, and then give you the other 20% on payment, minus their fees. Their fees are very, very substantial usually.

So you’d only do that in a situation where you can’t get a loan or for the amount you need, but invoice financing, it’s a real killer to your margins, but some businesses need it in the short term or while they’re growing. So that’s another way. Ultimately, you’ve got grants as well, there are a few government grants knocking around. Grants are great because it’s free money, obviously you have to pay tax on it in most cases, but a lot of the time they make you jump through a lot of hoops to try and get that money. And what I found is for the amount of money available in most grants, the effort takes to actually fill in the forms and put the business plans and everything in place is just not worth it.

Everyone’s got their own business plans, but often they want it in their format and done a particular way. So it just depends on the amount of money on offer, sometimes it’s worth it, sometimes it’s not. You’re the director of a business and the owner of a business, your time is incredibly valuable so you got to balance that up. And then you can go down the route of trying to get people to buy equity in your business, so you could essentially sell the shares. That’s less common because, especially if your business is small or very small, people don’t usually value the shares in that business. And the idea of buying a minority share holding in a small business is not appealing to most people.

And then obviously you’ve got the downside of actually selling part of your business as well, which isn’t always great, but sometimes it works because a partner will come in with their own experience and expertise and then add value to your business. So it does happen from time to time. And then an extension of that is you can go to crowd funding or crowdsourcing. So crowd funding or crowdsourcing who works in two ways, you can either get like a peer-to-peer loan, where loads of people lend you a tiny amount of money and make interest on it, or you can actually just sell bits of equity in your business to loads of people through some kind of platform. But once again, usually you need a broker to do that and they charge money need to do that.

So those are the main types of funding I can think of on the top of my head, but if I’ve missed something, then feel free to comment in the bottom and I’ll acknowledge that. And what I’d like to do is just offer you a free strategy session, so what we do is part of our Apex program is we give people free business valuation, and then talk to them about ways they can actually increase the value of their business. And as part of our Apex program, we also manage our customers clients cash flows, so that’s really, really important because earlier I was saying getting your cash flows right will really help you understand what type of funding you need. So if you are struggling with cash flows, then get in touch with us because we’ve got systems in place to make sure that your business can get the right kind of funding and has the right awareness of its cash to make the very best decisions. Remember if you found this video useful, remember to like, share and follow, and I will see you at the next video.

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