Sources of Business Finance
Long gone are the days when a business’ only means of acquiring funding was through a business loan from their bank. Alternatives have now given business owners more options, allowing them to choose the best solution to fit their needs. To help make that decision a little easier, we’ve put together a list of five popular sources of business finance, and the purposes each one serves:
1. Bank Loans
A bank loan is the most traditional form of business finance. Essentially, a bank will loan a business money based on its value, business plan and the perceived ability to pay back the loan.
Who it’s best suited to: Businesses with a good credit history who seek a lump sum for investment but aren’t in a hurry.
Pros: A bank loan is a reliable and trusted source of business finance. Banks can lend out high sums of money over longer terms with reasonable interest rates. A source of funding for making large purchases, or expanding a business with a good credit profile.
Cons: Bank loans haven’t been designed with the needs of small businesses in mind. The terms they offer are often rigid, and the loans themselves can be difficult to obtain without a substantial track record or valuable collateral. In addition, the application process is often complicated and time consuming, including business plans, legal fees. They are typically not fast to obtain either, with the average completion time for bridging loans in the UK being 50 days.
Be aware that: It’s not just banks who offer loans! If your credit profile is good, P2P lenders may represent additional options for you.
2. Business Credit Cards
A business credit card is a very convenient form of finance. But whilst it’s valued for its convenience; its physicality can leave your business vulnerable to theft or fraud.
Who it’s best suited to: Busy businesses who need funding quickly, especially for everyday expenses like purchasing stock or equipment.
Pros: A credit card is a reasonably quick and convenient way of sourcing funding when you need it most. It’s not particularly hard to qualify for (there are options to match most credit profiles), plus it’s unsecured so none of your assets will be at risk. If you repay in full each month, the cost can be very low.
Cons: It can be a risky way to invest in your business for a few reasons. Firstly, a credit card can be expensive as interest is usually high and can pile up quickly if the balance isn’t paid on time every month. A credit card is also generally better suited to spending smaller amounts, so if you’re in need of a bulk sum, there are better alternatives available such as a Business Cash Advance or bank loan.
Be aware that: Going over limit and/or late payments can cost a lot and contribute to a negative credit rating which will adversely affect the ability to access other forms of business finance.
3. Merchant / Business Cash Advances
A Business Cash Advance is a short-term funding solution that’s designed specifically for businesses who take card payments. Instead of making repayments as a fixed monthly cost, you’ll pay back as an agreed percentage of your customer card takings, meaning you’ll only have to pay back when your customers pay you.
Who it’s best suited to: Seasonal businesses who experience highs and lows throughout the year or those who need short term funding that’s simple to repay. Also those who haven’t got a spotless credit rating but can use their card takings as security in order to access funding to grow their business.
Pros: There is one fixed amount to pay that never changes so there is certainty when budgeting. Repayments are flexible and based only on paying back an agreed percentage of customer card takings (cash takings are unaffected). If business is booming you’ll pay back faster, and if your experiencing a bit of a lull, you’ll have more time to pay back – all at the same percentage. When repaying a Business Cash Advance, you’ll never be charged any late penalties or hidden fees. Plus the application process is typically simple and can be completed online in under 5 minutes
Cons: Your business will need to receive a minimum amount in customer card payments per month to be eligible for a Business Cash Advance.
Be aware that: This product is not APR-based. To compare it with other options, you can make a comparison of the total cost of finance.
4. Invoice Factoring
Invoice factoring is a type of debtor finance where a business sells its open invoices to a factoring company for a reduced amount that is available immediately. Essentially, you’ll be advanced funds whenever your business issues new invoices and the factoring company will receive payment of that invoice.
Who it’s best suited to: Businesses who have issued invoices and in are need of funding for everyday expenses to keep cash flow steady.
Pros: Invoice factoring is a flexible borrowing solution. The amount that a business can borrow increases as sales increase. In addition, the loan is unsecured, meaning your property won’t ever be at risk, like it might be with a bank loan. The other benefit is the outsourcing of the operations behind collecting payment from your suppliers as the factoring company takes on that effort and the risk of them not paying on time or at all.
Cons: Factoring can be risky. The factors legally own your debts, meaning that the invoices you raise count as their assets.
Be aware that: According to Startups.co.uk factor companies also aren’t known for being good at debt collecting, which could result in your company borrowing more for longer whilst paying higher interest rates.
Crowdfunding has grown to become an increasingly popular way for businesses to raise finance for new ideas and projects. How it works is simple: you sign up for a crowdfunding site like crowdfunder.co.uk, tell your story and what you want to achieve, and then set a target funding goal. It’s then up to you to promote your campaign effectively to encourage donations.
Who it’s best suited to: Start-up businesses with big ideas, or existing businesses with exciting project plans.
Pros: A good credit history isn’t a requirement for this funding method, so if you’re struggling to take out a loan due to poor credit, this is an ideal alternative. As a bonus, if your campaign is successful you’ll already have generated buzz surrounding your project, making it more likely to succeed!
Cons: There’s no guarantee you’re going to raise all the funds you’re asking for. And you’ll need to invest in telling your story, as unless your campaign goes viral, acquiring those funds is likely to be a slow process.
Be aware that: Crowdfunding isn’t going to work for small, everyday expenses like purchasing stock or equipment – it’s more suited for larger projects or product launches.