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Creating your own successful business can be extremely fulfilling. That said, it can certainly be costly and time consuming, particularly when starting out. In fact, it’s not uncommon for business owners to reinvest a portion of their profits back into their operation in an effort to finance various expenses.
Although spending your business income internally means you might not be making as much revenue, it will also save you the trouble of finding the right lenders or investors, which isn’t the easiest thing to do. Keep reading if you’d like to learn some ways of paying off your expenses using internal business funds.
As mentioned, you’ll typically have two options when it comes to financing your business in Canada, each of which comes with benefits and drawbacks:
Now that you can distinguish between these two forms of business financing, let’s talk about some of the main benefits and drawbacks of internal financing so you’ll have an easier time deciding which solution works best for your operation.
Now that we’ve covered some of the advantages and disadvantages of internal financing, let’s discuss some of the most efficient ways to access it, without draining too much of your profits:
When looking for viable internal funds, many experienced business owners will purchase and sell their company stocks. Then again, this isn’t possible unless your business is incorporated and may not be the best option for newer enterprises, many of which are already on a tight budget and cannot afford to make such investments.
An asset is any valuable property that you own the title to, such as a building, vehicle, or piece of heavy machinery. If you were applying for external financing, many business lenders would accept these kinds of assets as collateral. However, to access funds internally, you’ll have to sell them.
Before you try to sell one of your assets, there are a few things you should consider. For instance, certain vehicles and equipment can depreciate rapidly in value over time and may only appeal to buyers in specific markets. There’s a high chance that you won’t make your money back or be able to sell the asset within a reasonable timeframe.
On the other hand, some real estate properties can command a significant value, especially if they’re in ideal locations, like urban areas or tourist destinations. You may even find buyers who are willing to pay more than your business itself is worth.
Whether you’re looking for internal funds or having a cash-flow problem, one of the simpler solutions would be to manage your payments and transactions better. For example, if your business is based on purchasing and selling products, you can ask your suppliers to extend your payment plan or adjust the size of your installments.
If your supplier won’t negotiate, try to eliminate any unnecessary items from your inventory or, if necessary, reduce the volume of your shipments. Although you may only save a few dollars on the back end, decreasing your working capital would ideally leave you with some extra cash for daily costs.
Building a successful business is largely about customer satisfaction. That said, it’s not a great idea to allow your clients to pay late or extend their payments too far. Not only is this bad for business, but it can also cause you to delay paying your suppliers, which could break their trust and lead to your supply chain being cut off.
While spending money you’ve just made isn’t always appealing, using up your positive operating income is one of the easiest ways to make sure you have consistent access to replenishable internal funds (assuming you have a steady stream of customers). Even if it means you’re saving less and won’t have as much revenue to spend on larger or more time-sensitive ventures, at least you can avoid taking on any high-interest debt or draining the precious equity from your assets.
In the end, there are many reasons to finance your business using internal funds. However, there are many instances where external financing would be more appropriate for your particular enterprise, so it’s better to get all the advice you can prior to attempting any of the solutions above.
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Loans Canada is pleased to announce it placed No. 131 on the 2022 Report on Business ranking of Canada’s Top Growing Companies.
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