The financial challenges that come at various times in the business lifecycle are generally called “pain points”.
The first “pain point” is at the start-up stage.
Many people dream of becoming their own boss and starting a business that allows them to fulfil a particular passion, but it takes hard work and a good deal of careful preparation and research to raise enough funding to turn the dream into reality.
One of the biggest problems for start-ups in accessing finance is that they can produce little or no financial accounting history to support their proposals. They usually need to produce a business plan supported by evidence that they have researched and identified a sufficiently viable potential market for their product or service, but they may need more funding than they have currently been able to save.
In addition, the terms on which they can borrow may come with very strict conditions, such as additional security and Directors’ Guarantees, so that the lender is protected should the business fail.
The specialist lender Aldermore has suggested that one way for a start-up to save towards its initial costs would be a Government-supported Entrepreneur ISA.
Under its proposal the Government would provide a guaranteed 25% matched bonus to deposits of between £50 to £200 per month. Aldermore suggests a cap at £3000. The ISA would be targeted specifically for entrepreneurs to help them build up the capital for creating new small businesses.
However, arguably a cap of £3,000 is far below the likely funding needed for even a small start-up, taking into account the likely costs of overheads, essential equipment, essential marketing and, depending on the nature of the business, perhaps transport.
It may, in any case, be more cost-effective for the start-up to use asset finance to either lease or purchase equipment rather than using its own capital and with the asset providing some security to the funder a case may be viewed more sympathetically.
Assuming the new business is successful, there will come a point when its owner will want it to grow bigger, and this, too, presents its challenges.
Here, there may be further pain points. They include the problem of getting clients to pay invoices on time, leading to cash flow problems and having insufficient funding to take their business to the next level.
Aldermore has carried out research which found that almost seven in 10 (68%) of Britain’s entrepreneurs say that they have experienced financial barriers to growing their business.
It has a second suggestion, a Small Business Savings Allowance, which would allow sole traders and small businesses to earn up to £4,000 of income from savings, tax-free.
Again, this may be setting the bar too low.
Equally, applying for a commercial loan for expansion would provide money up front for growth with repayments spread over a period of time and financed from the increased revenue coming from the business’ growth. Releasing equity in assets that are owned outright could be another option. Late payment can be avoided by using factoring or invoice discounting services.
Although it is inevitable that businesses will have hurdles to overcome, there are ways that they can be mitigated by anticipating them, by careful cash flow management and by seeking the right financial help.