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One of the most important decisions a company director will have to make is what types of business funding sources they should use. Securing additional finance is vital to helping an enterprise grow, but not all options will be suitable for each firm.
Obtaining the right types of funding is just as important for a company’s growth ambitions than securing the money it needs, so it is essential to choose wisely. Reviewing your options should therefore be carried out in a similar way to how other business decisions are made – such as cash flow needs, property requirements and any leasing deals.
How to Choose the Right Types of Business Funding Sources
When looking for the right types of business funding sources, there are a number of important questions you will need to ask yourself. These include:
What is the Purpose?
Different types of business funding sources will be appropriate for different companies and different needs, so you will have to think long and hard about the reasons you are looking for finance. There are many different scenarios for which a company will be wanting to obtain additional finance, such as:
- To satisfy debts
- Consolidating other loans
- Funding expansion plans
- Purchasing additional equipment
You may also find that there are several reasons for wanting to obtain finance. While this is perfectly understandable, it may limit the amount of choice you have. Alternatively, you could find that a combination of funding sources may be more suitable for your needs. If you are ever unsure, it is a good idea to seek expert guidance as soon as possible so you can make more informed decisions.
How Soon will Funds be Available?
Once you have determined your reasons for wanting additional funding, the next thing you will need to investigate is how long it will take for the money to reach you. It therefore goes without saying that if you require the funds in a timely manner, this will automatically exclude certain finance options.
If you are wanting to secure the money for long-term growth, however, you may be willing to wait a bit longer for the funds to arrive. This should give you the largest pool to choose from, meaning you will have a lot more chance to find exactly the right source for you.
Another point to consider is that the speed in which the fund will reach your account could also have a knock on effect on the finance conditions. For example, if you choose a short-term option that grants you the funds quickly, you may have to pay more in interest for the privilege.
How do the Repayments Work?
Each method of finance will likely have different payment terms. Your loan may be short-term, meaning you will have to pay everything off in just a few months – while longer-term arrangements could take several years to clear. In addition, paying off your loans over a longer period of time might mean that you are charged lower increments but higher rates of interest.
Keeping regular records of your finances, such as cash flow projections and profit and loss accounts, are essential to helping you decide which funding source is right for you. If you end up agreeing to a payment schedule that you are unable to cope with, you could find yourself in a lot of trouble further down the line.
What are You Looking to Borrow?
If you have properly done your research beforehand, you will already have a figure in mind of how much you are wanting to borrow. Depending on the amount, you may find some sources of finance more competitive than others.
When deciding how much you are wanting to borrow, you could also think about making different purchases at the same time and paying them all off together – as this could work out cheaper in the long run. Alternatively, you may decide to keep borrowing at a minimum to make your repayments more affordable or ensure that your company does not reach its credit limit.
Types of Business Funding Sources Available
One of the main pain points facing company directors when looking for finance opportunities is the sheer amount of choice available. These include:
A business loan will typically enable you to borrow an agreed sum of money and then pay it back over a set period of time with interest. The two main types of business loans are:
- Secured: The borrower puts up some sort of collateral against the loan’s value, such as a house, car or even shares
- Unsecured: The borrower does not put forward any form of collateral and the loan is provided on the basis of the borrower’s current situation
This type of loan is seen as a source of finance for the short and medium term and is one of the most popular options for companies who are just starting out or looking to expand. If you are applying for this form of finance, the primary requisite is that your finances and accounts are up to date, and you have a clear plan to pay it back. Depending on the provider, you may find that there are other conditions you will need to meet.
Invoice financing lets business owners against the value of invoices that are owed by customers. There are two main forms of this, known as invoice factoring and invoice discounting. This funding option will typically provide borrowers with up to 85% of the loan value up front and then the remaining amount (minus the finance charge) when the invoice has been settled.
Although this is an excellent finance option, it is only available to companies with a strong record of generating revenue and receiving payment from customers in a timely manner. It is primarily designed to cover issues that arise from 30, 60, 90 or even longer day payment terms that can cause financial shortfalls.
Business Credit Cards
The most commonly-used finance option for small businesses, credit cards are typically used to pay for corporate expenses and will not incur any interest – provided the balance is paid by the end of the credit-free period. Each card will provide a different credit limit, typically up to £10,000.
Provided they are used responsibly, credit cards can be a fantastic way to build a strong credit report for your business. However, they should only really be for short-term use. A word of warning though, if you do not manage to keep up with your repayments, you could start occurring sizeable debts with large interest rates.
Merchant Cash Advance
Any company that uses a card terminal to accept payments from customers can obtain a merchant cash advance from lenders via their terminal provider. The provider will be able to see exactly how much money is flowing into the business, while the lender will provide funds in exchange for a percentage of the borrower’s daily credit card income. This level of visibility acts as security for the loan and repayment plans will be worked out according to your cash flow and average monthly profit.
Repayments are usually made as a percentage of revenue, meaning they are extremely proportionate with the borrower’s income. This arrangement works particularly well for companies that have a stable revenue stream.
Get Expert Guidance from Inquesta
If you are trying to find the right types of business funding sources, seeking expert assistance is essential. This is where Inquesta can help.
We have assisted companies from all industry sectors in securing the right type of finance for their circumstances. We understand there is no one-size-fits-all solution for all companies, which is why we will conduct a thorough review of your situation before recommending what we believe is the right course of action for you.
Because we have been involved in the industry for many years, we have built up an incredibly strong relationship with a wide range of respected commercial finance lenders that can provide you with the ideal source of income. For more information on how we can help, request a free consultation today or contact a member of our team.