The mantra of many successful entrepreneurs is the idea that you must spend money to make money. It is also one of the biggest reasons that some people fail to act on their business aspirations, because they believe that they don’t have the money required to take their business to the next level.
I believe that spending money or reinvesting in your business can reap big rewards and allow business growth that may not have otherwise been possible. Below are what I believe are some of the best ways to maximise opportunities when reinvesting in your business.
Reinvesting allows growth in a number of ways and there plenty of ways you can spend for growth. It can be as simple as reinvesting to hire the correct bookkeepers to handle the finances or paying off old debt from the initial launch. Reinvestment can mean putting a lot of energy into marketing and reaching new customers.
Regardless of what form it takes, reinvestment is the only way for the business to grow month after month. Failure to reinvest in the business will ultimately lead to stagnation and inability to grow altogether, which is why it doesn’t make sense to store all money in savings or to pocket profits for personal spending.
Planning ahead and making regular investments in your company, means you can easily start seeing results by learning which investments earn the highest.
At each major milestone the business reaches, the base operating costs may increase incrementally. Businesses should be investing in people, technology and infrastructure that will support minimizing those operating expense increases over time and drive profits.
The two types of capital available to small businesses include equity and debt. There are three types of equity for funding operations: Public Equity, External Private Equity and Internal Equity. The main sources of equity capital to small businesses are family and friends, crowd funding and sometimes venture capitalists. Although equity capital means business owners are free from debt and repayments, it also means they are giving up some control of the business they have worked so hard to build and they are diluting profits. Issues may arise when these equity investors disagree on any number of things including:
- vision for the business strategy
- view on particular investments to make
- the investment horizon
- when to distribute funds or to reinvest
Debt includes loans, overdrafts, mortgages, credit cards, leasing and hire purchase, which can be secured or unsecured. The advantage of debt capital is that small businesses retain control of their business and assets and do not need to answer to investors or share their profits. However, debt capital is now always easy to secure, with many small businesses finding it hard to secure financing from traditional banks and often traditional bank loans do not offer flexibility in terms of repayments which can affect cash flow.
There are also hurdles in securing debt capital for small businesses. Many small business owners struggle to find sufficient financing to expand their business. Banks place considerable hurdles for loan applicants to overcome and at times it seems as though the only people who can get money are those who don’t need it.
There are three obstacles in particular which can derail a small business loan application from the beginning:
- Poor credit: Poor credit is often taken as a sign that the applicant either doesn’t take their debt obligations seriously, or takes too many risks. Unfortunately for small businesses, credit evaluations extend beyond the scope of the company and into the personal life of the business owner. A company that pays all of its bills on time can still be rejected for a business loan, if the business owner has a history of poor personal finance.
- Poor documentation: Small business loan applicants often struggle with providing sufficient documentation in two crucial areas – cash flow and an insufficient business plan. While established businesses have tax returns, years of sales and a reasonable realistic projection of future earnings based on their history, a new business, however, is unable to provide proof of earnings or demonstrate that a year of good sales was more than an anomaly. While a hastily thrown together business plan may not address critical issues the bank will look for in its evaluation, including how the applicant will address the competition or what sets the business apart.
- Not enough collateral: A common mistake that business owners make is attaching a higher value to their potential collateral than the bank is willing to accept and therefore applicants may not have enough resources to secure a loan for the desired amount.
For SMEs wanting to maximise their chances of acquiring funds if traditional banks aren’t obliging, other finance options like exploring alternate small lenders may be an option.
About the author
Mark Hearl, is a leading business finance expert with over 16 years’ experience in the industry. He is the founder of Sprout Funding, a finance company specialising in small to medium business lending. He previously contributed Could your business use a financial detox and Why banks are rejecting small business loans.