Finance - Purpose of Finance



Main Purpose for Seeking Finance
Some of the reasons for business people seeking finance include:

" If you dont have enough capital to start, wait until your cash situation improves ..."

  • Start a new business.
  • Buy a business.
  • Buy a franchise.
  • To buy assets such as plant and equipment.
  • For working capital to grow the business.
  • To raise capital that can be returned to shareholders or the owners.
  • To arrange funds to buy out a partner or a shareholder.

 

  1. Start a New Business
    Finance to start a new business will be more difficult to arrange than other types of finance. This is because the lender has to take the risk as to whether your business will succeed or not. As far as the lender is concerned you have no track record to rely on, the size of the market is unknown, your product may not have been tested, your business may be in the wrong location, and your market research may be incorrect.

  2. Buy a Business
    Raising finance to purchase an existing business will be a lot easier than raising money to start afresh. The lender will look at the track record of the business that you are taking over, and if it looks sound with good profitability and has assets that can be used as security then you would have a high rate of success.

  3. Buy a Franchise
    Buying a franchise is even more attractive to a lender than buying a business. The reason is because most franchises have an established track record of success with a sound business system in place. You are in business on your own, but you are not on your own because of the support of the owner of the franchise (the franchisor).

  4. Buy Assets such as Plant and Equipment
    Arranging finance to buy assets is not as difficult because the assets will be used as security and the amount that you can borrow will depend on the asset valuation.

  5. Grow the Business
    Raising finance to expand the business will succeed if the business already has a record of success with good cash flows and good profitability. Expanding a business is always a good purpose because it provides confidence to the lender that things are going well.

  6. Returning Capital
    This is where you look at re-financing or introducing extra cash so that the equity sitting in the business can be realised.

  7. Buy out a Partner or Shareholder
    You may want to buy out a partner or a shareholder or even a competitor. As long as the business is successful and adequate collateral is provided to the lender, your chance of success would be good.