Sourcing financing for your business can be a challenging task, particularly if you have not previously applied for finance. The market has changed significantly in recent years, and the increase in the number of businesses providing ‘alternative finance’ means many companies requiring funding no longer approach banks, instead seeking other options. The alternative finance market is growing at a faster rate than ever before, it is expected to be worth almost £5 billion by the end of 2015, so there is no shortage of options for businesses that need to lend money.
The issue today is rarely a lack of credit available in the market, but rather that many business owners feel overwhelmed by the many different options available, and often don’t know where to start. In addition to this, the specific circumstances of your business normally dictate the kind of financing available to you. Factors taken into consideration include, but are not limited to, the reason for the financing, the amount of capital required, the age and credit history of your business, what guarantees you are willing to provide, and, in some cases, if you are willing to give up equity in your business. In this guide we provide a brief overview of some of the most common types of finance available today.
Asset finance is often a suitable type of finance for businesses that want to finance new machinery or equipment. This limits the number of businesses that are eligible for this type of finance as the business must be purchasing something physical. Specific examples of the assets might be a new excavator, a tractor or printing machinery.
The main advantages of asset finance are that payments are spread out over the agreed term, meaning huge amounts of capital are not required up front. The agreed term will be designed to suit your business with regards to the length of time that you require the machinery for, and monthly payments that are financially manageable. A drawback is that this can be more expensive than purchasing the machinery outright, however this is often outweighed by the benefits of maintaining a greater amount of working capital from the beginning of the agreement.
This is a particularly popular option for businesses that require capital at an early stage, but is also popular with more mature businesses too. This typically involves an individual investor or investment company buying equity in the business.
One of the main advantages of an investor is that they often bring business expertise that they can then apply to the business they invest in, as well as sharing some of the risks associated with your business and how it performs. However, one of the disadvantages of acquiring funding through investors is that you often need to give up equity in your business, and the investor(s) may have a great deal of influence in both the strategic decisions and day-to-day operations of the business. Additionally, if the partnership is not working out, it can be very costly and time-consuming to bring it to an end, as the investor owns part of your business.
You can apply for finance through a crowdfunding platform. As the term suggests, crowdfunding allows a large number of investors to invest small sums that together add up to the total amount of money required. Many crowdfunding projects have thousands of investors. The information about how much money you want to raise and what you require the money for is normally made publicly available so that members of the public can look at your business and your ‘pitch’, and decide whether they want to invest in it or not.
One of the key advantages of crowdfunding is that it can be relatively easy to raise money quickly, as most investors will ‘contribute’ a small amount to the overall total. In addition, it can create free publicity for your business; many crowdfunding projects have been featured in the media. However, the number of investors involved can also be a disadvantage, as often they have no interest in your business outside the return they should receive. Although a wide range of businesses have achieved financing through crowdfunding, businesses in more established and traditional industries can struggle to gain this type of investment if their business is not considered to be new and/or interesting.
This does not require much explanation, and bank loans are one of the most traditional and long-standing financing methods for a business. However, there are a number of different types of loans available, and the terms of each can differ quite significantly.
A key advantage of a loan is that it can be a straightforward way of achieving funds, especially when compared to other methods such as investment through investors, where often you will have to ‘give up’ some of the equity in your company. However, one of the biggest disadvantages of a bank loan is that it is difficult to be approved, and a number of strict criteria must be met, without exception. This strict criteria immediately excludes many businesses from being eligible to receive a bank loan. Another possible disadvantage is that banks may require the loan to be ‘secured’ against an asset that you own, meaning that asset will be seized if you fail to keep up with your repayments.
A more detailed overview of the range of key financing options can be found on the UK Government website – https://www.gov.uk/business-finance-explained/overview