Funding Options for Small Businesses
With the deepest recession in living memory finally behind us, many small businesses are looking towards the future with added optimism and now feel now is the time to grow their business. Growth requires investment, be it in new machinery, bigger premises or new and increased stock holdings – investment leads to new customers, possibly in new markets and even new countries. In most cases, investment needs to be funded.
Securing the right sort of business funding is a crucial decision for any business, whatever its size. For a small business however, the decision can be the difference between successful growth, and failure. It has to be for the right amount, be available when you need it, and be at the right price.
Some of the main funding options available to your business are summarised below:
Bank Loan
Arranging a bank loan with your bank is still thought of as the main way a business will gain access to funds which will enable investment.
What they require from you:
• The bank are likely to require a medium term business plan (up to 5 years), detailing how the money will be spent and the positive effects it will have on your sales and profits over that time frame.
• You’ll need to give the bank realistic cash flow forecasts showing that you can afford the repayments over the short and medium term.
• You may need to provide security against the loan in case you don’t repay it. This could be your house or car. This is a big consideration – think carefully about how much risk you take on before you get a loan which requires personal guarantees.
Time scales
• It can take several weeks, or sometimes even months to get from the initial meeting with the bank manager to getting the money in your account, so if you need a speedy turnaround it may be better to look at alternatives.
Rates
• Bank loans will often offer lower interest rates over a longer time scale than many of the alternative forms of lending.
Government backed loans
A government backed loan will usually need to be arranged through your bank. If approved it will be usually be at a lower rate of interest than a usual bank loan, as the government pays part of the interest charge on your behalf. You are also to be able to borrow more money over a longer time period. Such loans will only be available for certain types of investment. Your bank will be able to advise if your investment could be back by a government scheme.
What they require from you:
• The bank are likely to require a long term business plans (up to 10 years), detailing how the money will be spent and the positive effects it will have on your sales and profits over that time frame.
• You’ll need to give the bank realistic cash flow forecasts showing that you can afford the repayments over the short and medium term.
• You may need to provide security against the loan in case you don’t repay it. This could be your house or car. This is a big consideration – think carefully about how much risk you take on before you get a loan which requires personal guarantees.
Time scales
• A loan such as this can take longer than a bank loan to arrive, as there are more layers of management who will look at your application. It may take a number of months to get from the initial meeting with the bank manager to getting the money in your account, so if you need a speedy turnaround it may be better to look at alternative.
Rates
• Government backed loans will offer lower interest rates over a longer time scale than many of the alternative forms of lending, but the availability of these funds is low and you may not be eligible
Peer-to-peer lending / crowd funding
This source of funding is relatively new but its popularity is increasing rapidly. It provides an opportunity for savers to invest their money in businesses and receive a higher return on their investment that by putting in a savings account or other low risk ISA. Investors will compete with each other online to bid for investment in your company. Once the amount of money you have requested to borrow gets ‘bought’ by the online investors the repayment terms are agreed. The less risky your business is viewed by investors the lower the rate of interest you will pay on the money that is loaned, as more investors will outbid each other to bring down the interest rate.
What they require from you:
• You need to be trading for at least two years to be able to use the large majority of crowd funding companies. Your turnover will also need to be a minimum level to qualify.
• Once registered online your level of risk will be calculated. If your funding request is approved it will ‘go live’ to bidders who will decide how much they want to invest in your company, and at what rate of interest. Once fully funded the rate of interest can fall as new bidders drive down the average interest rate.
• Personal guarantees are likely to be required in case you are unable to repay the loan.
Time scales
• If successful, you could have your requested funds in your account within two weeks of first applying, so it is a very quick turnaround.
Rates
• Rates vary depending on the perceive riskiness of your business, but typical rates range between 9% & 12%, so they are more expensive than a bank loan, but cheaper than many alternatives. Such loans are often for 1-3 years, depending on your requirements and overpayments are often permitted.
Merchant cash advances
If you regularly receive money from customers via credit or debit card, be it face-to-face, over the telephone, or via the internet or mobile apps, then a credit card advance is a short term, if expensive option to get a quick cash injection into your business.
What they require from you:
• Such lenders will already have the information they need from your history of credit & debit card transactions so the approval process for this type of loan is usually straightforward. The amount they lend you will depend on your size and amount of card transactions you make.
• Personal guarantees may be required.
Time scales
• The advance will be in your account quickly once approved. Repayment is also quick, often only around 6 months and will be based on your card activity.
Rates
• Rates are comparatively high, often around 20%-30%. Repayments are made via a deduction from your card receipts. So instead of receiving £100 from a customer card payment you may only receive £80. Think carefully about whether your business can make enough money from the advance to make the high interest payments worthwhile.
Leasing & re-financing
If you are looking to purchase a new asset for the business, buying it through a lease is often an effective way of doing so. However if you are seeking additional funds not linked to a specific asset you may still be able to raise funds by re-financing an existing asset you’ve already paid for.
What they require from you:
• Many leasing companies do re-financing. If you can prove to the finance company you have the asset(s) you are looking to re-finance, the paperwork required is fairly straightforward. You will need the serial number of the asset(s) in question.
Time scales
• Re-financing only takes a couple of weeks from initial call to completion. Repayment terms will typically be 2-3 years depending on the asset you are re-financing and the amount of funds you require.
Rates
• Rates tend to vary greatly from lessor to lessor so do some research before you proceed. Rates can range between 10% to as much as 30%+.
DMF Accountancy can go through these funding options and more in simple, easy-to-understand terms, to see which option would be most suitable for your business. Give us a call or drop us an e-mail & we can arrange a no-obligation discussion of your requirements.
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