Business Finance: Learn the Basics of Financing

Business finance is once again taking centre stage as the global economy is expected to wobble. As you and your business trudge along the final lap of 2022, heading into 2023 is likely to be uncertain.

We have put together some growth hacks in business financing, which could make your navigation and enhance understanding through the landscape a little less uncertain.

We are already seeing some high-profile layoffs.

Economic Development Board of Singapore published a report from a survey in business sentiment in the manufacturing industry. Majority of the companies surveyed turned negative.

Singapore consumers and businesses are set to deal with the GST increase from 7% to 8% come 1st Jan 2023.

Whether you are running a new business, sole proprietorship or small business, we have you covered.

Especially for small businesses, other than yourself, what is the first thing which could keep your company going in times of economic crisis? Finance or working capital. And one of the most important tools in your business toolkit.

Even if you bootstrap and run your small business on shoe-string budget, you will still need capital or reserves to finance your business. There are many dimensions in which you can source for “dry powder” or money, in business finance.

Let’s explore some of them.

Understanding the importance in these two types of financing is necessary for your investment and company.

As a business owner, you put capital into your business or company. That’s equity. You can also get funds through equity sales of your organization to investors. This is known as equity financing. These investors would become business owners.

In business finance, funding which comes from selling shares is one of the attractive financing options as there are lesser immediate cashflow pressures in meeting regular payments. There are also no interest rates to worry about in equity financing. But you do need to pay attention to dividends. However, paying dividends is not mandatory.

The other form of capital is through debts, which you can loan from lending institutions. Simply put, you borrow money. There are also different finance options in debt instruments.

The benefit of raising finances through debt is that you do not give up equity in your business. But the downside, you must deal with (higher) interest rates from the debt you or your businesses undertake. And in most cases, you need to make monthly payments. You must also manage your finance from the recurring obligations for the duration of the loan.

Here is a table to show the pros and cons for each type of financing.

For most businesses, this in business finance is a subject matter which requires dedicated resources and certain expertise. While ABSS would not be able to cover the entire range and importance of business finance, we want to highlight several tips for business owners and managers like yourself.

Earlier, we mentioned bootstrap. This is essentially forking out your own funding at the nascent stage of your business venture. You are your own investor. This is also known as Personal Finance. It is common for would-be entrepreneurs to spirit part of their income for their new business, assuming they have a day job and develop a side hustle.  If you belong in this category, you may also borrow from family and friends, which are usually interest-free for your small business.

You may also tap into unsecured credit for your business, such as those from your credit cards. This is one of the quickest ways if you decide to get financing for your company.

You need to be vigilant in this type of funding as such debt comes with a higher rate. And you need to be disciplined to pay off debt and to pay on time whether you make profits or not. You may also have come across financing, which is free! This is commonly known as Balance Transfer. However, the cost of “free” money is built into the one-time administration fee which the lender would charge.

Whichever way you go, you need to decide which lender has the best offer and is the most efficient for your business finances.

The importance in business finance as a business owner is about funding its operation, whether from debt or equity. From buying company supplies to paying staff wages. From buying raw materials to supporting sales and marketing efforts.

If you are still charging business expenses and purchases using cheques, it may be time to rethink. The most obvious benefit is the loyalty points which can be converted into rewards you can redeem and reinvest back into your company. The rewards can be quite substantial in paying office utilities, stationery and stocking up your pantry.

Love it or loathe it. This may be the sentiment faced by many entrepreneurs who had experience dealing with angels. These investors are usually individuals who are rich.

One of the advantages in seeking out angel investment is not having the need to pay interest. And you don’t have to worry about meeting regular payments.

Angel investing takes equity in your company. The angel investors become your shareholders. And investor shareholders would be in lockstep with you to the profit and loss, along with capital appreciation and dividends from their invested amount.

A general rule of thumb of investment amount is $50,000.00 from an individual angel investor. It can be as low as $10,000.00 per pop.

Angel investing usually takes a small percentage of equity, such as 10% or lower. For small businesses, one of the disadvantages of funding from angels is that they can be demanding. Demanding in the sense that they keep asking you for updates on the progress of the business.

Generally speaking, quarterly updates with key details in the progress should be reasonable for a small business.

Instead of going for a business loan per se, we would encourage you to explore a bank loan coupled with government support.

Earlier, we mentioned about getting finances from your credit cards. But for more competitive rates to borrow money, the conventional lender may be the way to go.

When approaching lenders, such business debts are stricter. Some may require collaterals, such as your properties or stocks from blue chip firms which you may own. Depending on your business, when you purchase assets, it may also be necessary to leverage on debt to build up your credit scores.

With many types of business financing in the market, it can be mind-boggling to know which one to go for. We sized up some funding-related schemes, with collaborations from the Singapore government.

Environmental and sustainability are crucial themes with utmost importance in our fight against climate change.

The green movement is seeping into nearly all business activities across multiple sectors such as manufacturing, professional services and retail, where business finance is front and centre.

The Singapore government has been taking active steps towards going green and one of the programmes is to help Singapore-based companies to go green with funding schemes.

If your business has green-related projects which need financing, you may tap into EFS (Green), which is 70% backed by the Singapore government. This means that the lending institution which participates in this programme would have their loans to you guaranteed by the government of up to 70 cents for every dollar. If you had taken a loan of, say $3.0mil, and if you cannot repay the outstanding loan amount of $1.0mil, the lender would be sure that he can be paid $700,000.00 by the government.

EFS (Green) is managed by Enterprise Singapore.

As the name suggests, this pertains to food. There are three main categories in this programme, but we would only elaborate on one.

Innovation and Test-bedding, or I&T, aims at two areas:

• Innovation: Proof-of-value projects which develop farming technologies and systems to improve the farming process for the future. For instance, a new business in vertical and urban farming falls into this category

• Test-bedding: This refers to ideas or systems which are completely new in Singapore. They may be working in other countries but may not work here due to environmental or weather conditions.

The funding support goes up to $1.0mil for each project and covers a wide range of operational areas, such as purchasing assets, research and development (R&D) or paying for accounting and audit fees.

The programme is managed by Singapore Food Agency (SFA).

Besides funding, the biggest advantage when tapping into these government-collaborated finance schemes is getting access to the tools and other resources which can be hard to come by in small businesses.

For instance, in the ACT Fund programme, you may get free access to scientists and researchers to complement your efforts in R&D instead of forking out money to hire these expensive professionals yourself.

Like your personal bank account, you keep track of the money that goes in and comes out.  You may or may not use any software to keep track, but such software is an important tool to manage your business finance.

You need to ensure that the capital which comes in is accurately captured and reflected in your books.

Also known as Profit and Loss (P&L), this can be a one-page document to the revenue and operating expenses in your business financial year. It provides a glimpse into your business revenue, cost of goods sold, administrative, advertising and marketing expenses for the given year.

Balance Sheet is the document which indicates the Assets and Liabilities of your business. With the anticipation of difficult times in the coming months, it is crucial that you maintain a healthy balance sheet.

Liquidity risks are also higher now as banks may be more cautious in lending money.

This is the third set of documents which completes the key portion of the entire financial statements. There are three sections: Cash Flow from Operating Activities, Cash Flow from Investing Activities and Cash Flow from Financing Activities.

Essentially, information within Cash Flow shows where the money is coming in or going out. This document also showcases the specific period in the financial year and in cumulative format.

Running a business is hard enough. You do not want to give yourself unnecessary headaches from shoddy accounting and finance bookkeeping. Lest the authority catches up with you for wrongful financial reporting.

The recent report by IRAS in which over $270mil was recovered from tax evasion is a case in point. Many of these businesses also did not have proper record-keeping procedures. This is where ABSS accounting software  covers comprehensively for you in business accounting, tax and finance.