The Importance of Funding for Business

Without money, the machine of commerce does not run. Money is the lubricant and the fuel. It makes possible the smooth design, production and marketing of a product; and it keeps the administrative functions efficient. Money also moves the company forward by fueling growth and expansion. Revenues supply some of the money needed, but sometimes revenues are seasonal, and months go by with lean revenues that affect the operations of the company. This is when outside funding comes in handy.

An entrepreneur can perform a lot of business model development without funding; but when it comes to building the company, funding is necessary. Startup funding pays for incorporation, business licenses, insurance, facilities, equipment, marketing collateral and the hiring of necessary talent. It funds the manufacture of products and the marketing and distribution of services. It also pays for marketing activities that attract customers.

Once a company has launched, it must maintain an inventory of products to sell. If the company manufactures its own products, it must have enough money to manufacture the inventory, or it must have money to buy inventory from a manufacturer. Either way, a company sinks a lot of money into inventory before it receives the money it expects to make on the sales of that inventory. The inventory has resale value, so it serves as collateral for loans that fund its creation and warehousing. When the goods are sold, the inventory funding is paid off by sales revenues.

Employees must be paid on specific dates throughout the month, but customers don't always pay for their goods and services in time to fund the payroll. That is when a company accesses payroll funding to make up for any shortfall created by a time line gap between sales transactions and invoice payments.

When customers take extra time to pay their invoices, a company must factor in their invoices. Although most companies give only 30 days until payment is due on their invoice, customers frequently draw that out to 60, 90, 120 and even 180 days before they pay, particularly during recessions. Factoring involves the finance company buying the invoices at a discount of the face value and conducting their own collection activities. This cuts into the profit on each invoiced transaction, but it gets the money into company bank accounts in time to be used to pay for products, marketing and administration -- all of which creates more revenues.