Should a business invest its own cash or use finance?

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Funding a new business start-up or taking it to the next level of growth is going to mean an injection of funds.

It may be that it has some cash available but there are other finance options that may be a better option.

There are three main options for funding business growth, equity investment, cash and asset finance. Each has its own benefits and disadvantages.

Equity

Offering investors a share in the business in return for investment money is another alternative.  It can mean that the business has access to experienced people who can offer valuable advice and guidance, support and help. The downside is that the business owner may have to cede a significant amount of control and also that investors generally take a larger share of the profits than is the case with other forms of finance.

Cash

Using cash to buy stock or materials or equipment means that the business will take on no debts and will own all its assets.

However, it may not be able to grow as quickly as it hopes because it will have less money to invest in marketing and promoting itself. Equally, if its order book is growing quickly it may find itself with a cash flow crisis where it cannot accept new orders because it has insufficient cash to invest in additional stock, materials or staff to be able to meet those orders.

Finance

Realistically if a business is investing its own cash it should expect the return on its investment to yield about 15% a year if it is to be able to fulfil its plans for growth.

When finance is available to buy plant, vehicles or equipment at around 5% interest it makes more sense to keep the cash as a contingency reserve or to help the company to grow more quickly.

Using asset finance means the business has an affordable loan over a fixed period at a fixed repayment rate at the end of which the assets belong to the company.

Moreover, loan repayments for asset finance can be used as a business expense to reduce the tax bill and the business will not be risking its own cash on buying assets, such as cars, that will depreciate over time and earn it no money.