Finding finance from external sources is often the logical path to take when you want to grow or expand your business.
There are lots of different solutions available – and some might be better suited to your business model than others. Here is a quick introduction to the most popular financing options available, along with a brief breakdown of their pros and cons.
Secured business loans
Secured loans are those whereby collateral is pledged as a security for missed repayments.
For example, you could ‘offer up’ a property, a car, investments, or other assets to secure your loan, and this collateral would be taken by the lender in the event of a default. It’s a riskier option for you, as you could run the risk of losing your hard-earned assets – but because it’s a more attractive kind of agreement for your bank or building society, they will often be willing to offer lower interest rates and longer terms.
Unsecured business loans
These types of corporate loans are not tied to any physical asset. They are usually offered based on a review of your company’s credit rating, amongst other factors – and so you may not qualify for an unsecured loan if you have a poor credit history or have only been in business for a short amount of time.
They may be the best choice for risk-averse entrepreneurs, but they will often come accompanied with higher interest rates to account for the fact that the lender will have reduced leverage if you fail to make your repayments. Understandably, the lender will want you to pay back an unsecured loan in the fastest possible timeframe, meaning the terms on these agreements are often shorter.
Commercial mortgages and Buy to Let loans
If you’re keen to buy a new premises, it may make more financial sense to take out a commercial mortgage instead of paying for the property outright. Buy to Let loans are also available for SPV limited companies that wish to purchase investment properties, including Houses of Multiple Occupation (HMOs).
Business credit cards
These are not always the most cost-efficient option, but they can be useful for when you’re experiencing cash flow issues or need to get hold of funds relatively quickly. Business credit cards function in a very similar way to personal credit cards, though they often offer higher credit limits, as these figures will be based on your company’s annual turnover and expenditure. Be aware that many corporate credit card providers will require you to pay an annual fee alongside their standard interest rates.
Invoice finance
If you’re having trouble chasing invoice payments, invoice finance will allow you to access the cash that’s tied up in outstanding bills. It’s a good route to take if you offer long payment terms to your customers, or if you don’t want to take out a loan in order to take advantage of a new growth opportunity.
Asset finance
Truly a Godsend for companies that rely on physical equipment, asset finance allows you to make smaller regular payments for goods and assets purchased within your business. Using asset finance can help to keep working capital in the bank while you begin to earn back some of your investment.
Third party investors – angel investors and venture capitalists
If you are willing to allow others to purchase equity in your company, you could open up the floor to external investors. This could allow for a much-needed cash injection, or it could support you in moving away from the business as part of your longer-term exit strategy.
There are generally two different types of third party investors: angel investors and venture capitalists. Angel investors, or private equity investors, are individuals who will use their own money to invest in your company, whereas venture capitalists will use the money generated by a professionally managed pooled fund.
Crowdfunding initiatives
Instead of relying on investors, you could raise funds yourself by setting up a crowdfund. This way, other individuals and businesses can place money into your company in exchange for discounts, equity stakes, or even early access to your new products and services.
Peer-to-peer lending
Peer-to-peer lending often allows you to borrow more on more flexible terms, and access the money you need much quicker. Rather than applying for a loan with a bank or building society, peer-to-peer lending allows you to source investment from other people. You will pay interest to these ‘lenders’, but interest rates may be more competitive.
Government funding
There are lots of government-funded programmes available to businesses that cannot get funding from banks and other mainstream providers, including various loans, grants, and finance deals. In fact, there are far too many initiatives to mention here by name – but you can find the full list here.
Naturally, government funding is only available to businesses that meet specific criteria. Contact Dartcell for help determining whether your organisation is eligible for government support and what’s involved in the application process.