How can finance help my business?

Value exceeding cost is a simplistic mindset of how finance can help your business, but it is valid, nonetheless. 

Whatever your situation, finance can unlock value, expediate plans and achieve objectives.

Growth

Businesses looking to grow may do so organically or through acquisition. 

Organic growth can be financed by retained profits from successful trading. But where profits are extracted or are not sufficient to meet the ambition, finance products can be used to fund growth.

If businesses execute a growth plan without properly insuring it can be funded, the business can be starved of cash as debtors and stock increase. This is often described as overtrading and can lead to distress or can even be fatal for the business. 

If funding is needed to support growth, it should be put in place at the outset. A business plan which has stood up to challenge will identify any funding need.

Acquisition

A business may look to acquire assets such as property or plant, or it may look to acquire other businesses. Funding can be considered in respect of both acquisition scenarios.

Funding an asset purchase will be familiar to those who own their own properties. Commercial mortgages are a product for businesses looking to acquire premises. Hire purchase, lease and other finance agreements are commonly used to fund purchases of plant and other chattels. 

There are unique, bespoke, and niche asset acquisitions to consider also, which are typically driven by the trade of the business. Assets which are less commonly financed but have a costly outlay will require specialist consideration around durability, serviceability, and value. 

The acquisition of a business will often attract a funding need. This could be a replacement or continuation of existing debt in the target business, or could require funding to purchase the business itself. 

Succession

Where business owners are looking to exit a business, this can be achieved in several ways. 

One way could be through a sale of the business to the current management team. In this scenario, termed a management buyout, the management team within the business will purchase the business from the current owners. This has many advantages, but a common challenge is that the management team will often not have the personal resources to fund the purchase. Debt can be used to bridge the gap between what the management team can afford upfront and the sale price. 

The transaction is structured so that the debt is taken on by the business. The debt repayments become an overhead of the business, which reduces current earnings for the new owners. However, this value is unlocked when the management team sell their interests in the business as part of their succession.

Distress

Despite preventative measures being deployed, any business can be exposed to financial distress, often caused by uncontrollable external factors. 

Distress does not need to be fatal. If the underlying business is strong and there is a robust plan to navigate the pressures on the business, lenders will support businesses through hardship. Finance can be used to fund short-term cash-flow problems, whether that be working capital as a whole or in the completion of specific projects.

Any funding application should be made with advice. In times of distress all stakeholders will be cautious to protect their position and business owners can create personal exposure for themselves. Decisions should be informed, with plans scrutinised by advisors.

Restructure

When businesses find themselves in distress and that distress proves fatal, a restructure of the business may allow for parts of the business that have a future to be salvaged. 

A restructure will typically involve a movement of value from one legal entity to another. No different to any other acquisition. 

However, where a business has failed, it is more challenging to use historic trading data to support the funding application. Funding can still be achieved based on expected performance or by using assets of the new business.

Closing remarks

The areas explored here on how finance can help your business are not exhaustive and are not specific to your circumstances. 

The challenge is in identifying how finance can add value to your business, before understanding how that value is delivered. Because if finance brings your business greater value than its cost, not accessing it simply a missed opportunity. 

Find out how Bishop Fleming can help offer advice regarding finance.