Securing the right form of funding at the right time is often integral to the success of a growth business looking to expand its services or move into new markets. The window of opportunity can be quite small, so it is important that businesses move to build their finances swiftly and effectively.
Traditional lending methods may not benefit a growing business and their operation model – so, it is vital that all alternatives are fully explored. There are more finance options available to businesses than ever before, and we’re delving into some of the alternative methods of raising funds that your business could consider.
All these methods of financing come with their own set of advantages and disadvantages, meaning there isn’t a one-size-fits-all option for businesses looking to borrow in order to stimulate growth.
Sometimes known as peer-to-peer lending or loan-based lending; debt crowdfunding is the process of a business appealing for a loan via a crowdfunding or peer-to-peer lending platform/website. The business stipulates the amount required, the length of the loan, and the objective of the money, and individuals/organisations/groups invest as they see fit. Usually, the investment will be spread across multiple parties, splitting the risk and reward proportionately.
Debt crowdfunding is not dissimilar to applying for a loan from a bank, so may prove a suitable alternative for businesses who have previously struggled to secure credit from banks. The business is afforded a degree of control over the terms of their lending agreement, and there are almost limitless parties who could provide the cash.
Additionally, most crowdfunding websites provide online dashboards, so all parties can monitor the process of the investment and track the repayment period.
As with bank loans, the repayments made by the business will need to incorporate interest charges. Furthermore, the success of the process hinges on the business successfully finding a crowdfunding platform which will host the investment opportunity, as well as interested parties willing to invest the required amount.
Similar to the above, the more traditional form of crowdfunding opens up investment opportunities to a great number of people using similar platforms. The main difference is that the funds do not need to be repaid – however, there does need to be some incentive in order to attract investment, otherwise the business may struggle to secure the total they seek.
Via crowdfunding, it is possible for businesses to secure the funding they require without having to hand over any shares or equity. Furthermore, the business will not be required to pay back the investment – and the cost of securing the funds could be significantly lower than the value of the investment. This is particularly advantageous for businesses offering products/services which are quite unique and have the capacity to inspire goodwill, intrigue and interest amongst investors.
For this method of fund sourcing to be successful, the business’ products/services need to be eye-catching and the initiative needs to be well marketed. Crowdfunding projects are very common, especially those hosted on the net, so a campaign needs to be unique to stand out.
One of the most popular and trusted methods used by small businesses to secure funding, an angel investor or angel network provides funding in exchange for shares in the business, or partial ownership. These investors can take the form of silent partners, or may wish to have a more active role in the business operations.
Some angel investors will use crowdfunding platforms to identify potential investment opportunities, whereas others may prefer to invest in individuals and businesses they already know.
Funding from an angel investor can be a quick and efficient way for businesses to secure a cash windfall it would otherwise take them years to accrue. An affluent investor or group could help a business dynamically move into new markets or develop new products/services.
Furthermore, if the angel investor has entrepreneurial or business pedigree, they may be able to share their expertise, contacts and connections to benefit the business. Having a highly-experienced and highly-skilled individual on board could help open new markets to a blossoming business.
Depending on the agreement with the angel investor/network, the business may have to hand over shares/partial ownership. This can be difficult for owner/managers who feel very protective over the business they have built and developed. Furthermore, if the business grows and becomes very valuable, the shares passed over to the investor(s) could be worth a huge amount – a sum you’d rather keep for yourself.
Although asset finance may be a new term to many, most business owners will be familiar with its two main types: leasing and hire purchase. Businesses will use asset finance to rent or buy essential pieces of equipment. In essence, a business is given access to machinery or equipment they otherwise could not afford or would have a detrimental impact on cash flow – paying off the cost over a set period.
For small businesses reliant on expensive and specialist pieces of equipment, asset finance can help to spread these costs and allow the business to establish itself. The interest charged on asset finance deals can be favourable, and specialist leasing companies will be able to provide expert advice and guidance.
This form of financing can only be used by businesses looking to invest in equipment – so is only suitable for certain businesses. Additionally, the total value of this option is not as great as buying the equipment outright. At the end of a lease period, the business will have to return the equipment, and hire purchase agreements have interest attached.
Company credit cards
A more short-term solution to managing a business’ cash flow, credit cards can be used for more than just wining and dining clients. A number of credit card providers offer products which allow users to borrow interest-free for up to 56 days. For small businesses reliant on every invoice being paid in a timely fashion, the cash flow management of a credit card could provide the security needed to make their own payments.
Small businesses who complete work for contractors with a range of payment terms will have greater freedom to manage their cash flow. In the very early stages of a business’ lifecycle, this could be the difference between staying afloat and going under.
If a payment is not received within a credit card’s relatively small interest-free window – debts could soon mount up, and sizeable interest charges could be applied. This could be problematic for small businesses which have minimal resources to handle the burden of extra costs.
Early stage and development loans
Some businesses in their early years can struggle to secure loan funding from banks and lenders, partly because they have minimal assets to secure the loan against. An alternative to this could be an early stage and development loan, similar to a traditional loan but with higher interest rates.
Banks and lenders will attach higher interest rates to mitigate the risk of lending money without any collateral to fall back on.
Perhaps the only advantage of this type of funding is that it can be secured by even the smallest of startups, as there is no requirement for assets to be put up against the loan. This means that small businesses in desperate need of cash may be able to use this type of loan to their advantage.
The high interest rate does not offer great value to small businesses, and could be crippling if the funding doesn’t secure the growth intended.
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Built for businesses with slow-paying invoices and lengthy payment terms, invoice factoring can help free up capital when businesses need it the most. In essence, a factoring company will purchase the invoices from a business – usually paying about 80% of the value of the invoice.
The factoring company then owns the invoice, are responsible for chasing the cash, and are entitled to the subsequent payments from the debtors.
This guarantees an immediate cash windfall for the business, and alleviates the necessity to pursue debtors. This is great for small businesses which rely on every invoice payment, and do not possess the resources to continually chase debt.
Invoice factoring provides a solution for small businesses which have cash flow problems caused by unpaid invoices. Having invoice factoring as a potential fall-back plan removes the risk of invoices going completely unpaid. Additionally, the effort and resources required to chase outstanding invoices is removed.
A factoring company will never pay the full value of invoices – meaning that their value is reduced significantly. For small businesses reliant on every penny, reducing the value of their invoices could have a huge impact on the bottom line.
Furthermore, invoice changing and developing a robust payment process is vital for every business looking to grow. If a business becomes too reliant on invoice factoring, they may never develop the in-house skillset to chase payments in an efficient and timely manner.
Like many of these finance options, invoice factoring becomes less viable and effective the larger and more mature a business grows.
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