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Business Finance

Every business needs to evolve in the market place and there are many different options available to every type of company if you are looking to expand.  In order for a business to continue to evolve and innovate then there comes a time when additional capital is required.  Before undertaking the process of obtaining the additional finance it is important that the purpose of the additional funds are clearly defined and how the money will be used to increase the profits.  Often business finance is needed for the purchase of capital items such as equipment, land, buildings or vehicles.  It could be that you need to increase the levels of stock that you hold to fulfil increase in demand for orders or to innovate in new technology or products in your field and expand the research and development or even to expand into new markets.  Whatever the purpose of the extra financial injection the principles still remain the same and careful consideration is needed before approaching the financial institutions.

If you are the owner of a small business then you will most likely be interested in the different types of financial options which are open to you.  It can be considered that there are six main ways to finance your business, depending on the type of business that you run will decide on which is most suitable.  A good way to obtain funds is to agree extended credit terms with your suppliers; generally speaking the credit terms can vary from supplier to supplier, anywhere from 7days to six months.  For any new business when cash flow can be a problem setting up good credit terms with your suppliers can be crucial, this will give you enough time to make sales in order to pay off the creditor and re order supplies.

Many businesses that have company cars, trucks, vans or machinery may look into the option of leasing the equipment rather than buying.  Many companies will have long term lease contracts with finance companies or short term lease contracts which enable them to have all the necessary equipment without an initial large outlay.  When leasing an asset this can be a very tax efficient way to reduce your tax bill, the costs can be deducted as a business expenses.  There are many other benefits to leasing equipment or vehicles one of which includes depreciation.  As we are all aware assets depreciate over time, when leasing these assets the depreciation does not apply and after the initial lease period the equipment can then be returned and replaced with new.  If you need to borrow money to finance the lease of the equipment you can deduct a proportion of the cost from your taxable profits each year, this is known as Capital Allowance.  Depending on your business size will relate to how much of an allowance you can get, in General small and medium sized business can get a higher allowance than large businesses.  There are many different aspects to capital allowance whether you are buying outright or leasing.  If you borrow money to buy equipment then remember that you will have other costs on top, these include equipment repair costs and ongoing maintenance, plus if you sell the asset to replace for new your proceeds will be less than your initial outlay.

One of the most common ways that business finances their needs is to use the banks; it is possible to have credit arranged with the bank when a large outlay is required.  It will be a requirement though that the bank secures the loan or credit arrangement against any assets that you have in case the company goes into bankruptcy.  If you take out a loan against your business then this is a deductible expense when you calculate your profit or loss figures for your tax bills.  With borrowing of this type you can only offset the costs when the finance has been used for the sole purpose in use within your business.  Likewise, if you are financing your business through other methods such as overdrafts or credit cards this can be treated as a taxable expense but again only if used solely on your business.  When borrowing money for business reasons there are many tax efficient ways that can help to reduce your tax burden.  It is possible that the tax relief can possibly offset some of the additional costs of borrowing the money; however it is with careful consideration that any borrowing should be made.

One of the most effective ways to raise business finance can be a method known as invoice financing; this is a new alternative to the more restrictive overdrafts or loans that can be taken.  This is regard as one of the most effective ways to raise finance and improve cash flow so your business can grow.  Invoice financing is basically a method that companies can use to unlock any money that is held up with your debtors in the form of unpaid invoices.  In general around 85% of the unpaid value of the invoice can be unlocked and the rest made available upon the payment by the customers.  This is a really flexible and fast alternative that many medium sized businesses can use to raise working capital; generally annual turnover must be around £500,000.  The finance provider will take in a monthly fee and interest is paid on the net amount advanced.  The fees and charges may prove to be a more cost effective way to generate cash flow than the traditional methods, careful financial assessments should be made before undertaking any commitment or obligation and usually your accountant can give you the required advice. 

These are just a few of the methods that you can use to generate finance within your business, there are others that may be available to you but the main points still need to be carefully considered, these are: - which is the most cost effective method to raise the capital, always take into account the taxable benefits of how to raise the capital and consult your account before taking on any financial obligation.



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