Loss financing in business
The establishment of a business has consequences that are almost fixed. It will either break even and make profits or fail and make losses. These two scenarios will certainly have a middle ground, at least, in some of the times. When preparing business plans, business people are always advised to factor in the possibility of making losses and the risks involved in a particular industry.
All these are known as business contingencies. There are many aspects that may cause a business entity to make losses. These will include stiff competition which may involve undercutting, introduction of alternative products into the market, natural occurrences like severe weather changes, change in legislation and political uncertainties, amongst others. From these causes, it is easy to appreciate that financing of losses will greatly depend on the causes of the loss and not on any pre determined parameters.
The following are some of the ways in which business people can finance their ventures during loss making.
Tax Planning
Different countries have different ways of dealing with tax matters. What will cut across all jurisdictions is that simple planning is always the best. However, in cases of continuous losses it is important to know whether the taxes that you pay to the government are deductible or non deductible. You may also find it advisable to seek the services of tax consultants who will advise you on what can be avoided as far as tax is concerned. Insistence is placed on the word avoidance because in all stable countries, evasion of tax is a crime.
Supplier advances
If you are in the business of selling goods, it is very possible to seek credit from your suppliers. Off course it will be tricky for you to get any goods when your loss making is quite evident and maybe irreversible! Anyway, most suppliers that you have had a good experience working with in the past may be willing to extend stocks on credit if the cause of the loss making streak is reversible or when they fully understand the business’ potential.
Angel investors and venture capitalists
Many of the equity investors are also risk takers. Indeed, venture capitalists, especially, are known to invest in businesses that are in the lucrative industries but are either poorly or weakly managed. Their intention is to get into the business and rejuvenate it through new systems that allow for a real turn around. However, investors should be advised that loss of control comes with any financing assistance that they will get from most, if not all, venture capital investors.
Government grants
Governments are known for stepping in to assist in the financing of businesses that are making losses. An example may be drawn from the recent bail out of some of the greatest companies in the United States and even in emerging economies. The American Investment Group (AIG) was recently advanced $ 85 billion by the Federal Reserve to recover from its loss making spree. Grants from governments, however, usually target industries and institutions that are so beneficial to the development of the economy or for the growth of social welfare. Approaching the relevant authorities for financial assistance may make that needed difference.
As we had earlier pointed out, the mode of financing businesses that are making losses will greatly depend on the creativity of individuals and not the contents of text books.
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