The importance of business financing

Today setting up a business has its complications and it is a process where you must carry out planning, development, checking and acting. To have a good business model, you have to carry out a study on the clients, value proposition, media, and, of course, the source of income that the project will have. Some may finance the business themselves with their own funds. On the other hand, others must carry out the financing through external financing. In this article we are going to talk about the importance of business financing, dedicating ourselves fundamentally to the financing of others.

When to resort to external financing?

The importance of business financing is crucial for its growth and profitability. This can come in two forms: own or others. Own financing comes from the company’s own resources, while external financing comes from other channels external to the company itself.

Most companies need to resort to external financing to cover their financial needs.

The importance of external business financing when setting up a new business, service or product. What advantages does it bring?

Have resources that you currently do not have

This is a very important aspect when setting up your own company or increasing your activity with a new service or product. The company can function properly through financing that will later be paid. On the other hand, the financing allows you to have the necessary resources and material to be able to carry out the perfect functioning of this new service.

Growth and immediacy to start developing a new service, product or business

Whether it is forming a new company or a new service/product for your company, you can start it up without having to wait for your own savings to start it up. Once you know the needs of your business, thanks to financing we can start operating and obtain short- and medium-term profitability, despite the fact that in the future we will have to pay interest for the search for financing.

Provide a second view of profitability and opportunities

External financing entities can give a different point of view to your ideas, business model or new service/product that you want to acquire; providing you with new opportunities and profitability for your company. Being bodies impartial to the company, they provide a different point of view. This contrast of external ideas between the financing entity and the company is an appreciable objective assessment to continue with the project.

Plan the project

When having to request external financing, you must make sure when to resort to it, what budget to request and how you will use the money to manage the new investment. As soon as you perfect the necessary expenses of your company, the costs and risks for it are reduced.

Tax deduction

In Spain, interest on external financing can be eligible for a tax deduction. This does not happen with dividends when resorting with financing through own funds. This means that we can obtain greater profit by financing part of our assets through external financing.

Financial appeceament

The importance of financial leverage to grow the profitability of your company. External leverage is when the company borrows funds from an external agent that it will allocate to increase larger products/services in order to increase profits. In this way, you will have a balance between your own financing and external financing. It is true that there is a risk when making the investment, but it increases the attractiveness of our company because it is more profitable. This is one of the main reasons for the importance of business financing to increase the profitability of your business or company.

Risk reduction in personal assets

We can carry out a capital company as a legal form of our business. In this way, we can only lose every last euro of the company without endangering our personal assets. However, they may ask us for some type of business or guarantees that affect our personal assets.

Advantages and disadvantages of requesting a bank loan for your business financing

Among the advantages of using this type of solution we can highlight: immediate financing, adapting the credit to your needs, knowing your debt at all times and knowing when to make payments at all times.

On the other hand, requesting a bank loan has some disadvantages such as generating long-term debt, paying commissions, the need for a guarantee or guarantee of payment and carrying out procedures and paperwork.

Are there other payment methods to finance your company? Discounts for promissory note

The answer is yes. In recent years, the promissory note modality is becoming fashionable, which is a form of payment where the debtor pays the amount he owes for the acquisition of goods and services after it occurs. Instead, a document is signed promising to make such payments, but not paid on the spot.

The main problem with a promissory note occurs when the payment cannot be made; carrying a risk. For this reason, it is necessary for the supplier to review the document well, since it is the only proof to manage the future payment. However, the customer has no risk.

The promissory note is a form of payment that, in turn, can function as a means of financing for companies. In this way, the company can continue managing its services or the sale of its products without the need to make the payment when it receives the materials for the development of the company. The supplier secures the money within the agreed term and to ensure that it will collect, it can request a promissory note discount from a financial institution (it is the institution that assumes the risk).

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