Self-funding your business vs external finance

02/03/2020

One of the most important decisions you will make for your business is how to supply the appropriate level of funding. In the current climate, is going it alone still a viable option?

In the Small Business Finance Markets 2018/19 Report, it was revealed that just 36% of smaller businesses are using external funding, which compares to 44% in 2012. Furthermore, 7 in 10 firms surveyed said they would prefer to forgo growth rather than take on external finance.

These figures suggest that a lot of smaller businesses in the UK are most comfortable relying on themselves for business funding.

But with more finance options available than ever before for these businesses, it’s always worth taking the time to review the advantages of different funding options.

Advantages of self-funding

There are a number of benefits of going down the route of using personal funds.

You’ll remain self-sufficient. As the cash resources available to the business are likely to be limited, the emphasis will be on a self-sufficient business model whereby expenditure doesn’t exceed income.
Keep control of your business. Certain forms of financing, such as equity financing, may also force a business owner to relinquish some control. When self-funding your business, you will have the final say on all financial decisions.
Don’t pay any interest. You won’t have to worry about interest, which is part and parcel of most external funding solutions.
No set up time. Getting started with external funding can be a lot of work depending on the type of finance you are going for and how much research you will need to do into your options. Self-funding allows you to hit the ground running.
Build inhouse experience. You’ll gain experience fast when you rely on self-funding. Some tasks – which are often outsourced to specialist providers – will need to be completed in house.

Despite all these benefits, self-funding can leave your business vulnerable in the case of an unexpected issue, limit your growth and increase the impact of late payment on your cash flow.

It’s worth considering different external finance options to see if there is something that could work well for your business and provide you with extra security.

External funding options

While in the past the options for funding have been limited, particularly for smaller businesses, there are now a multitude of alternatives to consider.

While traditional options such as bank loans and overdrafts still have their merits, more flexible and solution specific options such as invoice finance and asset based lending could appeal more to businesses that are looking for an alternative to self-funding.

If these still seem too limiting for your business, alternative options such as peer to peer lending and crowdfunding may also be worth taking into consideration.

It’s important that every avenue is considered regularly as the business grows and encounters new challenges. After all, given the speed with which the economic climate is changing, what might have worked six months ago for your business could be improved upon today. The key is getting that balance right.

There are advantages of external funding that can be applied to all of the above. If you’re still on the fence about pursuing different funding avenues, consider the advantages below or request a call back from one of our funding consultants to discuss your position.

Advantages of external finance

Using external finance offers a range of benefits that you will need to consider.

You will retain a financial buffer. For businesses relying on internal funds, they often have just enough to cover running costs and maybe a small reserve. However, using external finance means you have a financial buffer that can be used if unforeseen issues arise.
Unlimited potential growth. One of the big benefits of external finance is that it can grow in line with your business, allowing you to seize new opportunities and achieve your potential growth.
Easier to preserve resources. Having access to ongoing funding sources, such as invoice finance, can stop you having to dip into your reserves every time you face a late payment or similar.
External input. While self-funding means you will maintain total control, you can also end up missing out on external input, advice and support that could come with a funding facility.

Whether the chance to promote the business at a trade show, take on new orders or invest in new machinery, a business’s cash flow determines what it can spend and when.

Taking on external finance is often a great way of making sure you can cover these costs without having to make sacrifices elsewhere in your business.

Are you looking to rethink your funding strategy? If you are why not give us a call on 0800 9774833 or request a call back to discuss your requirements with one of our expert funding consultants.