Start-ups rely on financing from external sources to take their business off the ground. The funding companies include but are not limited to:
- Lenders
- Banks
- Venture capitalists
- Angel investors
- The government
Well-established businesses also rely on financing from external sources to take up big projects. An immediate injection of cash is a must to hit the ground running. In this day and age, getting business finance should not be a complicated thing to deal with because the lending industry has evolved to flexibility over time. There are several types of business financing, and each one has specific benefits and drawbacks.
Things you should know about getting business finance
Getting business finance can be quite hard. There are various options available to you, but each one is subject to a few drawbacks. You should carefully weigh up all options while getting business finance.
Business lending – secured and unsecured
Business loans can be used for all types of expenses of your business including:
- Equipment purchase
- Buying a bigger space
- Hiring more staff
- Buying stocks
- Acquiring another business
- Expanding your business
- Day-to-day operations
- Consolidating debt
- Improving cash flows
The amount of money you borrow can be small or large depending on your needs. Your lender will not ask you to put down collateral if you borrow a smaller sum. Start-up loans and business overdrafts are not subject to collateral.
Start-up loans
Start-up loans will be quite expensive because there is no certainty about your profitability in coming years. Your lender will make a lending decision based on your business plan. Make sure it is relevant, realistic and robust. Your profits will be projected to determine your affordability.
| Pros | Cons |
| You do not need to submit collateral. | Interest rates will be higher. It can be a bit hard to pay back the debt. |
| You will get lump sum money to start your business. | Start-up loan fees will add burden to your pocket. |
| You can build your business credit score by paying it back on time. | They follow strict eligibility criteria. It can be difficult to qualify for a loan. |
| You do not need to lose equity. | Your personal credit rating can also be checked. |
Business overdraft
Overdraft allows you to borrow money as and when you need up to a pre-agreed amount.
- It is a type of credit you can apply for through your bank.
- You will pay interest on the borrowed sum and overdraft fees.
- Short term business loans are the alternative to business overdrafts.
What if you need a large sum of money?
You may need a large amount of money to buy premises or new equipment. Lenders cannot approve your application for a large loan without collateral. There are various types of secured loans such as:
- Invoice financing
- Equipment financing
- Asset financing
| Pros | Cons |
| You may borrow a larger sum. | You need a suitable asset to borrow money. |
| The size of monthly instalments will be smaller due to extended repayment periods. | Your will lose the secured asset in case of a default. |
| Interest rates will be lower than unsecured business loans provided your business credit report is good. | Despite lower interest rates, you will end up paying a lot of money as interest due to longer repayment plans. |
Invoice financing
It can help you fix your temporary cash flow problems. You can borrow up to 90% of the value of your invoices. The rest money will be handed to you after collecting payments due against invoices and deducting the cost of the service.
- When the finance provider collects payments from your debtors, it is known as invoice factoring.
- When you collect payments yourself, it is called invoice discounting.
You should consult invoice finance brokers so you can get the maximum value of your invoices funded.
Asset financing
Asset financing is another secured business loan. You can borrow money against the value of machinery, vehicle or a piece of land. You can continue to use your property or asset, but there is a risk of losing your assets if you fail to repay the debt.
Business credit cards
With the help of a business credit card, you can make all purchases. You can use them to fix your cash flow problems as well. The limit of your business credit card depends on your business revenues, business credit rating and reputation. Some banks go to great lengths to offer you the most affordable credit card deal when your relationship is good with them. Business credit cards cannot be used to meet the setup cost of a business. You can use it for day-to-day operations.
| Pros | Cons |
| It helps maintain your business and personal expenses separately. | Your personal credit score can also be affected in case of missed payments. |
| It helps establish a business credit score. | You will have fewer protections compared to personal credit cards. |
| You should make convenient payments. | Interest rates will be quite high. |
Angel investors
Angel investors are similar to venture capitalists but with one difference – angel investors are wealthy people and invest their own money in your business while venture capitalists invest money belong to others.
Angel investors can support your business whether it is a start-up or an established one. Their knowledge and networking can help your business grow faster. How much money you can raise from angel investors depends on how much proportion of equity you are willing to sacrifice.
| Pros | Cons |
| Angel investors are good for early stage investment. | You will lose control of your ownership. |
| You are not taking out a loan, so there is no risk of making payments. | They may ask you for protection warranty in case your business fails to pick up. |
| You do not need to put down collateral. | You cannot make decisions solely. |
| There is a greater degree of flexibility. | There will be an increased pressure of hitting targets and achieving results. |
Government grants
Government grants have been designed to help start-ups that need an immediate injection of cash. You should first check your eligibility for government grants. You do not need to lose ownership but they come with a very small amount. Most of the grants are aimed at small businesses only.
The bottom line
Getting business finance can be quite tough because a number of factors play a role in it. Regardless of financing option you choose to fund your business, you should carefully examine your credit score and business profitability. Many entrepreneurs find it hard getting business finance, but with careful research you can grab the best option for you. For more such informative articles, visit here.