The ABC of Business Finance

When it comes to starting or expanding a business, raising the capital yourself isn’t the only option available. Financing your business through lenders and investors is a common way to get the money you need to ensure your business gets a strong start or makes it through the scaling process with the resources that it needs. Here, we’re going to explore the major financing options available to most, highlighting their advantages and disadvantages.

Business loans

The traditional option and also the financing option that tends to offer the highest loans available. A business loan is usually taken out from banks, but more alternative lenders are springing up to offer terms that traditional lenders do not. For instance, some lenders offer short-term financing solutions to help cover rough periods and fight problems with cash flow.

Larger, long-term business loans tend to be the most common, however. Start-up loans have the explicit purpose of offering the funding that entrepreneurs need to get their business running. Other loans can help cover the costs of purchasing stock, taking on staff, buying equipment, moving premises, or otherwise scaling your business. The business owner or directors are liable for the loan, which is taken out in a lump sum and repaid over time. For large loans, a business plan might be necessary to convince the lender that your plans justify the amount you want to borrow.

Invoice financing

Lots of businesses receive payments by sending invoices to their clients. Waiting on invoice payments can sometimes lead to cash flow problems, especially when clients are slow to act on them. For those businesses, invoice financing can help them see the cash they are rightfully owed much more quickly.

Invoice financing isn’t quite like a traditional cash loan. Instead, the lender buys as many outstanding invoices as you have. A fee is added on top of each invoice, slightly reducing the amount you would get if you had waited, but it can help free up cash stuck in invoice limbo.

The two most common kinds of invoice financing are factoring and discounting. Factoring sees the lender handle the sale and the customer directly, while discounting means that you are still responsible for seeing the invoice paid and owe the money you collect to the lender after the fact.

Crowdfunding

An option that has grown significantly more popular thanks to the internet sees you seeking funding from many investors, rather than just one. Crowdfunding isn’t a loan. Rather, your investors, or “backers” as they are known, contribute money towards a funding goal. You set a limited amount of time to raise as much money as you need. If you don’t reach your funding goal, however, you keep none of the money that has been raised, releasing it directly back to your backers.

As it isn’t a loan, crowdfunding does not require the borrower to pay their investors back. Some business owners make up for this by offering free products and services or other goodies to investors in exchange for donating certain amounts of money. Many crowdfunding platforms do charge significant fees on money raised, however, so it’s worth looking up the terms and conditions of any platform you use to raise those funds.

Other forms of finance

There are other kinds of business financing growing more popular in the business world as well. They include the following:

Peer-to-peer lending: A kind of social lending, this type of loan has become much more common as a result of the internet and firms like Funding Circle leading the way, with most peer-to-peer lending platforms being online-only. Different investors contribute to the loan, expecting a return on their money. Terms tend to be much more flexible than with banks.

Merchant cash advance: Primarily used as a short-term funding option for businesses that rely heavily on credit and debit card transactions, this involves having an MCA provider take a look at records of merchant account sales. For instance, they might look at the average month’s card sales and offer a lump sum in advance. Then, the borrower offers a percentage of their card sales until the debt and additional fees are paid.

Asset finance: Asset financing offers business owners the cash they need to buy assets, such as machinery or digital equipment. The user pays for the asset over a set time period, at the end of which they will have paid it off entirely, allowing them to offset the costs of buying it outright.

Business owners (and future business owners) would do well to know the scope of finance options available to them at any one time. They can serve as the fuel your business needs to invest in equipment, in property, in staff, and more, allowing you to push for the growth that it needs to make it in today’s markets.