Business Funding & Finance

New business owners often use their own money or personal loans to provide the finance required to grow their businesses. Personal finance is normally used as it is often easier to get than business finance. However alternative lenders can now provide fast and easy business funding & finance.

There are risks in using personal finance for your business

If you use personal finance for your business and it doesn’t earn sufficient income the business won’t be able to service the loan and you are personally liable.
If you inject personal funds into your business you and don’t make enough profit you won’t be able to pay yourself back.

Ideally, any business finance should be in the business’s name same as bank accounts especially if it is a limited company. It is always tidier for separate entities to have their own liabilities and is also easier for you at tax time. Keeping this separate will also help to create a good credit history and add value/ make it easier to gain finance for your business in the future. Any finance will incur interest however interest is a claimable expense.

Business is all about generating income and the most common finance for business is to purchase assets or stock. Even if you have money sitting in your bank account it is not always the best idea to use it to pay for an asset as the purchase price is not fully claimable in the year that it is purchased, as assets (currently over $5,000 after 17th March 2021 $1,000) are required to follow depreciation rules. Finance to purchase assets that are going to derive income can be considered good debt. Finance can allow you to purchase assets that otherwise would negatively affect your cashflow.

The success of any business is dependent on cashflow. You should ensure:

That invoices are issued on time
Regularly check your accounting reports – profit & loss and balance sheet
Create cashflow projections and budgets to ensure you can build up cash reserves

Loan payments need to be made on time to build up your credit score. Having good credit will make it easier and cheaper to obtain finance in the future. If you have defaulted on a loan or always pay late this will be taken into consideration by any lender when you apply for new finance. Credit Cards also count as finance and if you have multiple credit cards these should be consolidated to limit repayments.

Before applying for a loan there are a few questions to consider

What is the loan going to be used for?
How much finance is needed?
What is your business’s current financial position?
How is your business’s credit history?
Is there a different type of funding that can be used?

These questions are relevant as you are emotionally invested in your business and you need to remain objective when considering finance. This is to ensure you are clear on the purpose of the money and in what way this will have a positive impact on your business. When working out how much finance you will need consider other factors that will increase your costs such as insurance for the asset etc. Check how much you have in your accounts and create a cashflow forecast so that you know what is coming up and to ensure that you will be able to service the loan. If you are unsure about your credit history you can find out about checking your history here.

Depending on what you’re needing the loan for there may be other options. For R&D funding Callaghan Innovation provides funding for eligible businesses for growth funding and IRD has R&D Tax Credit Incentives.

There are quite a few types of business funding and finance available: