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External finance is an important consideration for business owners in order to grow their customer base. It can be a great way to help you grow your business and get you, as business owners, closer to achieving your goals and grow your business. There are many options available, so it's not always easy to decide which one will work best for you. This article discusses the five most common types of external finance that entrepreneurs use in their businesses, including crowdfunding and equity financing.
1. Is crowdfunding for me?
Crowdfunding: Through a crowdsourcing platform, you can raise funds from large numbers of individuals. You might be able to get more funding on this type of site than in the past — especially if your business has an interesting story or is promising future innovation. The key here is to nail your pitch and raisee awareness well before you list.
2. Equity Financing?
Equity financing involves selling partial ownership stakes (equity) in your business to external investors. While you may well raise finance you are also losing part of your company, so take the time to research term sheets, warrants and the different types of shares that a Shareholder agreement may refer to. And, never forget thee shareholder agreement!
3. Unsecured business loans
Unsecured business loan programs are a popular option for a quick cash injection. The loan is ‘unsecured’, meaning you can access the cash without having assets in your business to put up as security. This increased level of risk for the lender usually means these are limited to businesses with strong profits.
Small businesses loan
A type of secured lending that’s approved and repaid over an average period of three years.
Business loans
Smaller companies in the manufacturing or service sectors can apply for this sort of unsecured borrowing to fund day-to-day operations by applying for business loans. Business loans are the most common form of lending for small business owners in order to grow a larger cus.
Bank loans
Banks offer conventional business loans to businesses that are not eligible for an unsecured loan or equity financing, typically because their assets are insufficient.
As a director, you may also be asked to provide a personal guarantee to further satisfy the lender’s requirements. This means you will be held personally liable if the business defaults on its loan repayments. It might sound daunting, but putting up a personal guarantee demonstrates confidence and commitment to your business. It can also mean the difference between securing cash, or not.
4. Asset finance for equipment
Business finance is not just about loans. You can now get more bespoke, tailor-made solutions and a non- loan program designed to meet particular funding need to suit your target market. Although it’s something of an umbrella term, asset finance essentially enables you to get equipment without having to pay for it upfront. This means that it eases you to buy an item by spreading the cost over a period of time, the other is more like renting and leasing it for as long as you need.
It mainly falls into the categories of hire purchase and leasing – one enables you to buy an item by spreading the cost over a period of time, the other is more like renting it for as long as you need.
Hire purchase:
This lets you buy an item by spreading the cost over a period of time, which means it eases up on your cash flow in the short term as long as you can afford to keep paying for it. Hire purchase contracts are usually structured with repayments paid monthly or fortnightly.
Leasing:
In a leasing arrangement, you usually sign up for an annual contract that states the total cost of the equipment over its lifetime. You still own it at the end of this time period unless you choose to buy it from the company for full price or extend your lease agreement. Some deals may offer payment flexibility so that if you want to, you can pay for a different amount at the end of each month.
5. Invoice finance
Imagine how much money small businesses would have at their disposal if only all those outstanding invoices were paid on time. Invoice finance is the answer to that problem. Late payment or impractically long payment terms often cause cashflow problems for small businesses that could be stifling growth plans.
Unlocking that money could be enough to help you kickstart the growth needed to take your business to the next level.
With invoice finance, once an invoice is raised, the lender will forward you around 85% of cash (usually) and settle the remainder minus a service fee. Usually, new customers sign up for an annual contract which states the total cost of finance, interest rate (including monthly and yearly), and the number of invoices payable over a year.
The service fee for new customers is usually around £160 per annum but will vary depending on the lender.
With invoice finance, you can have access to cash that would otherwise be tied up in outstanding invoices with no penalty or fees attached.
Invoice Finance positive impact on the business
Invoice finance has had a positive impact on business owners, as it helps to unlock cash that would otherwise be tied up in outstanding invoices with no penalty or fees attached.
New customers usually sign up for an annual contract which states the total cost of finance, interest rate (including monthly and yearly), and the number of installments payable over a year.
Late payment or impractically long payment terms often cause cashflow problems for small businesses that could be stifling growth plan, and invoice finance can help to ensure you never find yourself in this situation again.
6. Trade finance
Trade finance is designed to plug the cash flow gaps in the international trading cycle. For some businesses, delays between placing orders, receiving and shipping goods to an address, and receiving payment can be a barrier to international trade – and therefore team growth.
It helps plug one of those gaps by enabling wholesalers, distributors, and importers to pay for the supplies they need to get the process underway. A lender will pay the supplier for you and you pay them back once the customer’s payment is received at the end of the cycle.
The nature of trade finance means that it can be very short-term, or cash is available to borrow for a few days. This is great news if you need money urgently and don’t have the time to wait around for loan approval because no credit checks are needed. It also provides small business owners with peace of mind - knowing that they can get the money they need without having to rely on a bank.
Cash flow is one of those things in life you know will happen at some point, but it's always nice when you're not waiting for your next payday.
7. Revolving credit facilities
It essentially provides continuous access to a pre-approved pot of money, like an overdraft without the bank account attached. Borrow up to an agreed limit and once you have paid some back, you can borrow more. The loan automatically renews, or ‘revolves’.
It’s generally a quick and convenient way to get money without having to apply for a new loan each time. The loan amount is usually based on one month’s revenue, and because cash loans can be accessed within hours the interest rate tends to be quite high. However, given that revolving credit facilities are designed for short-term access to cash, an annual percentage rate (APR) isn’t necessarily a useful comparison, and they can work out cheaper in practice depending on how you the loan.
The loans are usually paid back over a set period of time through an agreed schedule of fixed payments. There are secured and unsecured loans, with various pros and cons associated with each loan type is. A form of financing that helps small and medium-sized enterprises to grow their business. A typical bank or other financial institution offers loans, which are usually paid back over a number of years through an agreed schedule of fixed payments. The most common types are secured and unsecured loans; each has its own set of benefits and disadvantages.