Getting access to adequate financing is often the biggest hurdle for entrepreneurs and existing business. A lack of finance constrains your operations and raises the risk of insolvency and other financial issues. As an entrepreneur or business owner seeking new financing, it’s time to expand your horizons and discover other exciting alternatives for financing your ideas and keeping your business growing and profitable.
The two main types of finance
There are two main types of finance: debt finance and equity finance. Debt finance is when you borrow money from an external lender, such as a bank or alternative business lenders. Equity finance is when you have stakeholders invest money in return for partial ownership in your business. Your business can have a mix of both types of finance and utilise a mixture of different types of debt and equity finance options.
Other options for injecting funds into your business beyond debt and equity options include government and private grants and entering contests.
Borrowing from non-bank lenders
Non-bank lenders (also known as alternative business lenders or commercial lenders) are not regulated by the same laws as banks and credit unions. They have their own lending criteria that can be much more flexible than those of traditional lenders such as banks, credit unions, and building societies. Since their terms and conditions can vary significantly, always make sure you fully understand your obligations, and seek advice if you have any doubts.
Debt finance options
Retail and supplier finance
Retailer financing options let you buy goods and services through store credit, which is arranged through a finance company. This option typically includes high interest rates, but some retailers will offer specials such as initial no-interest periods. Examples include equipment purchases or equipment lease arrangements.
Some suppliers offer delayed payment for goods and services. This is a form of financing since your business can retain money owed and use it for other purposes. The supplier might charge you a fee for the delayed payment, so make sure you are clear about what you will end up paying for the extra time.
Invoice factoring has become very popular with some businesses. This type of financing is when your business sells its accounts receivables (invoices) to a factoring company. The factor company might pay you a percentage (80 or 90%) of the invoice value, and the customer then pays the factor company directly. The business benefits because they obtain the cash without waiting for the payment period and can for example pay off suppliers right away, which can then allow them to keep production capacity high.
A slight variation on this financing option is invoice finance, which is the same except the factor company advances you money and you repay the factoring company when your customers pay off their invoices.
Business line of credit
Similar to supplier credit, a business line of credit is when a lender (alternative or traditional) gives you funds in exchange for interest payments. They might offer you a line of credit based on your trading history and/or your equipment and assets.
Unsecured business loan
You can obtain unsecured business loans from alternative lenders on the basis of things like your trading history, personal guarantees, and cash flow history.
These lenders can be individuals or companies that connect with your business through a peer-to-peer-lending platform. This can be a great option for businesses looking to connect with non-traditional lenders, but there are things to keep in mind when using this type of financing. Peer-to-peer lending can also be a form of equity financing if you give the lender equity instead of paying interest.
Equity finance options
Other than using your own savings, venture capital is probably the most well-known equity finance option. Venture capitalists are professional investors or venture capital funds that invest large funds into your business in exchange for equity and the chance for large future returns as your business grows. They might be heavily involved in the direction of your business and might seek to recover their funds within a relatively short period of time.
Popular with startups, this type of financing offers mentoring as well as funding. They might invest smaller amounts than venture capital funds and do so in exchange for a smaller interest in your business.
Family or friends
Another popular and easy option is to borrow from family or friends. These arrangements are best supported by a formal, written contract to avoid disputes and misunderstandings. This type of funding can be considered debt financing if money is borrowed on the basis of you paying interest instead.
Crowdfunding is similar to peer-to-peer lending, but it can be either debt or equity financing since some crowdfunding arrangements involve the investors retaining ownership in the business. On the other hand, some crowdfunding projects focuses on products and services being delivered, or interest being paid in exchange for the borrowed funds.
Private investors and business angels
Like venture capitalists, private investors or business angels might invest in your business in exchange for equity and a share of the profits in your business. Angel and private investors will typically seek more equity than other types of equity finance partners.
Floating your company is a high-profile way to grow your business and attract more funds as it often raises the profile of your business. This financing option can be complicated and expensive, and its success will depend on stock market conditions.
Having a sound financial plan on the way to success
Once you understand the types of financing that are available to you, you’ll be able to work out how much you need and develop a business plan to meet your goals. Other factors to consider are your timeframe for repayment and ongoing obligations. Work with your accountant or financial advisor if you have any doubts about your financing obligations.