If you are starting a new business or expanding an existing one, you might need to get financing and get it fast. If that is the case, you need to carefully consider the kind of financing you choose as this could seriously affect your cash flow.
Before you apply for financing, you need to consider the following:
- determine the amount of financing you need
- get a solid business plan developed
- consider the time frame that you will need for repaying the loan
- determine what your ability is for repaying the loan
Tip: Consult with your business adviser or accountant to get professional advice to help ensure you make solid financial decisions for your business.
Types of financing
There are two major types of financing that are available for your business – equity finance and debt finance. First let’s look at equity finance.
Equity finance is where either your own money is invested, or the funds come from other investors, usually in exchange for shares or equity in your business.
The major sources for equity finance are:
- Personal finances – using your own funds from selling personal assets or personal savings to self-fund your business.
- Venture capitalists – these are professional investors who invest large sums of money (as equity) into businesses with the goal of achieving for high profit and/or growth potential.
- Friends or family – you may offer friends or family to become a business partner or offer them a share in your company in exchange for capital investment. You really need to be careful with this option since a breakdown in a business relationship might affect personal relationships as well.
- Private investors – also referred to as business angels, they tend to be wealthy people who are prepared to invest money into a business in exchange for a share of profits and return on equity. These people are rare and hard to find.
- Crowd funding – this involves a large group of individuals collectively raising capital, mainly through online crowdfunding or social media platforms. It enables investors to offer large amounts of money in exchange for equity shares or for a reward such as a first-run products or other business perks.
- Crowd-sourced equity funding – this is a means for small businesses and start-ups to raise money via the public. Usually they rely on raising small amounts of money from many investors. Every investor may invest as much as $10,000 per year in a company, and in exchange receive shares.
- Government – a majority of government assistance that is available for small businesses is in the form of low cost or free advisory services, guidance, or information. However, in certain circumstances you might be eligible to receive a grant, for exporting, innovation, research and development or business expansion.
If you are unable to achieve any of the equity funding options listed above, then you are left with no option but debt finance. This is money that is borrowed from a bank or non-bank lender, or other types of external lender. It is actually not unusual for a business use a combinations of both debt and equity financing. The main debt finance sources are:
- Financial institutions – this includes institutions such as building societies, credit unions, and banks. Financing may be provided in the form of a loan, line of credit, or overdrafts.
- Retailers – buying goods for your business on store credit through a finance companies. Unfortunately, these options may require little to no upfront payment, but often have high interest rates. However, an interest free period is offered by some retailers but you must be disciplined in maintaining your cash flow to avoid having to pay any unnecessary interest.
- Suppliers – when you have trade credit from suppliers it allows you to pay for goods at a later date. Not everyone has the ability to chose this option as it is really dependant on having a good relationship with the particular supplier. If you don’t have a track record, this makes this option almost impossible.
- Peer-to-peer lenders – this type of service matches individuals with money who want to invest with individuals looking to borrow money. These loans usually need to be repaid within in a certain time frame. The interest rates can vary according to how much risk is involved.
- Friends or family – might offer to loan you money. In order to avoid any misunderstandings it is very important to get a formal written agreement in place that specifies the loan terms, interest rate, and repayment requirements Seek legal advice on how to draw a loan agreement up.
- Non-bank lenders – There are a number of online non-bank lenders to choose from that offer fast, simple and inexpensive finance options. LoanOne is one of the fastest growing financial companies in Australia who fall into this category. We offer both personal loans and business loans with competitive rates for different industries. Our loans are fast, flexible and can be tailored to both your personal or business needs. So if you’re stuck using traditional finance options, LoanOne can help you.