Funding your business is an ever-changing project. Sometimes it means finding some extra cash to ensure even cashflow throughout the month or quarter, and other times you’ll look to fund specific projects or clients.
The trouble is, there are so many ways to do it that it’s difficult to know where to start. Let’s take a look at some of the common ways to get funding for your business.
Start-up loans and grants
If your business is very new or you want to start one, it’s probably too early for standard business finance or equity investment. Most of your options for this stage come from the government, whether through a grant or a start up loan.
There are hundreds of different grant schemes available around the country, usually restricted by region or business type. The government’s website has a filterable list of the various grants to help you find the right one.
Start up loans (from the aptly named Start Up Loans Company) are a little different — they’re aimed at helping innovative potential businesses get off the ground by borrowing up to £25,000. Backed by the government, the interest rate is fixed at 6% and the repayment term can be anything between one and five years. Importantly, start up loans include free mentoring, pre-loan support and various other initiatives to help you make a success of your business idea.
For businesses that are further along the line, equity can be a good way to supercharge your plans — selling a stake in your company can make a big difference to available cash levels so you can invest in future growth.
However, not everyone can get equity finance. After all, you’ll have to convince potential investors that they’ll get a good return on the money they put into your business. Equally important is that you might not want to sacrifice a stake in your company and dilute your ownership.
There is also a huge variety of lending available to businesses — from standard business loans to funding for specific purposes and sectors. There’s a huge amount to say on the subject, but here’s the top-level summary you need to know:
There are two major category of business loans — secured and unsecured. The former uses physical items owned by your business as the basis for a loan, whether it’s a commercial property, vehicles, or machinery. The latter doesn’t require security, so it’s more directly based on your turnover, profit margins, and credit history.
You can also find products that use creative forms of security, such as the merchant cash advance, which is based on card terminal sales and repaid as a percentage of them. It’s even possible to use your personal pension to fund your business!
If you want funding for a specific item like a new van or some specialist equipment, asset finance is the thing to look for. This area of the market includes equipment leases (essentially a long-term rental agreement), and hire purchase (a way of buying something in instalments).
If you want to unlock cash from things you already own, you can also use products like sale-and-leaseback to sell valuable items but continue using them for a monthly fee.
If you offer trade credit — i.e. invoice your customers for completed work or delivered goods — invoice finance allows you to get paid faster. The basic concept is that the lender gives you the majority of what’s owed to you, and then you get the rest minus a fee when your customer pays.
This means your payment terms don’t have to get in the way of daily cashflow, and you can plan inflows and outflows with more confidence.
Invoice finance comes in a few different flavours, such as factoring which includes credit control and discounting which is usually confidential. There are also products that allow you to choose specific invoices or specific customers to finance, leaving the rest of your sales ledger unaffected.
As you can see, there’s a number of different ways to give your business a cash injection — and choosing the right method depends on your business profile and your goals. If you need help navigating such a complex market, services like Funding Options exist to match you to the best lender for your needs.
Whatever your plans, the good news is that with all this choice, it’s never been easier to raise business finance.
Conrad Ford is Chief Executive of Funding Options, recently described by the Telegraph as “the matchmaking website for small businesses and lenders”. With the free Funding Options service, you can quickly search dozens of alternative business loan providers with FundingOptions. @FundingOptions
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