Business Finance: Options

Business Finance: Options

A vast array of options have always been available when looking to finance a business venture or looking for an injection of cash into an existing business. Prior to the credit crisis of 2008 banks were the primary source of funding and most other methods were looked upon with a sense  of ‘far too complicated’, ‘only big business does that’, or even ‘will I go to jail if I get caught!’ The reason for many of these comments against unorthodox methods of funding was because they were not promoted and quite simply banks or brokers made little or no money selling these products.

With the restriction of the finance market since 2008 the options to raise finance reduced. The so called unorthodox methods became main-stream and as they were used used more and more they are become more acceptable to businesses that previously viewed them as high risk.

A good broker will now possibly advise on methods that previously were unmentionable. The reason being is that other avenues have closed up and it may be the only way to find finance. When a business starts to look for finance nothing should now be discounted. It must be stressed however that when looking into finance of any kind the pros and cons should be fully weighed up against the personal situation of the individual or that of the business. The benefit of help from a professional and qualified financial advisor should not be overlooked.

What are these unorthodox methods of finance then? A brief list may include the following:

Start Up Loan: usually only for new businesses or those who have only been trading for no longer than 2 years. These are government backed loans and are repayable at a fixed rate of interest to help with budgeting repayments. One provider of these loans in the Yorkshire area is http://www.befund.org/ other areas may have their own providers.

Cash advances: the financer bases their credit facility on debts owed to the business before they have actually been paid. The financier purchases a fixed percentage of future credit/debit card transactions at a discount, and then advances the cash. Repayments are scheduled at about 10% to 20% of every transaction. Whilst this method of pay-back helps with cash flow there is usually a tough set of conditions to be met before finance is provided.

Asset finance: this works the same way as a mortgage. You borrow money against an existing possession. Assets which can be used as collateral include property and premises, accounts receivable, inventory and equipment. Interest rates are much higher than normal mortgage rates but this method is useful for a business desperate for cash and with a high level of assets. As with a mortgage however, if the finance is not repaid the asset will be repossessed.

Factoring: you auction your invoice to a community of investors. You receive payment straight away and the investor will receive a profit when the payment finally comes in.

Business Angel investors: A business angel is a person or group who are so impressed with you or your business model (for all concerned let’s hope that is both!) they may provide investment in return for an equity stake in the business. This is ‘Dragon’s Den’ so the pitch needs to be good and the business needs to know everything there is to know about its marketplace.

Crowdfunding: for a business to finance itself. Small sums (usually) are requested by a business but the number of investors expected is high. As the sums are low there will not be the same level of intensity as a Business Angel. The return for the investor is restricted but the venture may be something close to their heart. Many crowdfunding investors also become enthusiastic customers too as they have an interest in how the business is performing and want it to be known that they have an important part to play in the business.

Peer-to-peer loans: a personal relationship between you and the lender is created and trust established. A number of companies are available to help with this, and if the initial loans goes well this can be a very effective and economic method of raising finance

Micro-loans: loans tailored to the circumstances of the business and, as with many of the finance methods mentioned here, can be used alongside funding from other sources. Businesses with a community based angle (helping to retain jobs, keeping open amenities etc ) may be able to raise this funding from government sponsored initiatives. Funders such as http://www.befund.org/ mentioned above can also help with this type of finance.

Community schemes: having mentioned community based businesses above there are a number of Community Development Finance Institutions (CDFI) throughout the country that will help with finance when the more orthodox lenders have refused. Details of the CDFI’s in a particular area can be found online or in local press and community publications.

More information on the above methods and details of contacts able to provide these methods of finance can be obtained by contacting us at info@mjdhughes.com

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