A constant supply of cash is like fuel that keeps your business going forward. Irrespective of monthly sales performance, entrepreneurs require sufficient capital to cover the ongoing operational overheads for day-to-day business activities. A considerable amount of earmarked funds is recommended for entrepreneurs to capitalise on opportunities that come their way, but sometimes it falls short of cash. Fortunately, there are various funding methods.
Asset financing, equipment finance, business loans and credit financing are some of the most commonly used options to fund business expenses, but none of them is one-size-fits-all. It is advised that entrepreneurs carefully understand their needs and choose the most appropriate option.
Reasons why business finance is vital
Despite being profitable, your business might need to be reliant on external funding sources to support growth, for example, or to bridge short-term cash flow gaps. Here are the reasons why business owners rely on external funding sources:
- Expansion – if you are scaling up your operations or branching out into a new market, external funding sources can help furnish you with needed capital.
- Marketing and advertising – marketing expenses can be disproportionately high. Withdrawing earmarked cash will leave you cash-strapped for emergencies.
- Talent acquisition – hiring is not inexpensive. In order to build a team of talented people, you will need to provide competitive salaries, training and benefits.
- Debt management – sometimes businesses rely on consolidation loans to club all their outstanding debts so that they have only one large loan to handle.
- Working capital requirements – a cash flow is never stable. To fund the gap in working capital, external funding sources come in handy.
- Equipment upgrades – investing in new equipment is necessary to improve productivity. Here comes the role of business finance.
What are the types of business finance?
Here are the business financing options you can consider:
- Business loans
Business loans could be small or large. They start from £5,000 and are paid back over an extended period. You can use business loans for a variety of reasons that include, but are not limited to, expansion, scaling, launching a new product, entering into a new market, equipment or space purchase.
| Small business loans
§ Small business loans are unsecured in nature. § They start from £5,000, § The maximum amount could be between £20,000 and £25,000. § You will have to give a personal guarantee. § Poor credit scores will attract high interest rates and restrict the loan amount. § They can help build your credit score, provided they are paid on time. § You will be personally liable to repay the debt in case your business fails if you have given a personal guarantee. |
Large business loans
§ They are secure in nature. Your business asset will be secured against the loan. § These loans start from £20,000 or £25,000. § Subprime borrowers find these loans easier to secure than unsecured business loans. § Your company’s strength must be good. § You should have a consistent growth in net profits. § They also help with building a credit score. § There is a huge risk of losing your collateral in case your business fails to discharge the debt. |
Business loans are suitable for all kinds of business expenses except small emergencies when you need a paltry sum to fund the gap in working capital. The most ideal usage of these loans is expansion, property purchase and equipment purchase.
- Equipment finance
Equipment finance in the UK is a type of secured business loan. They are used when you are purchasing equipment. It could be hard for businesses to pay for equipment outright. Equipment financing will enable you to purchase equipment by spreading the cost. The equipment you purchase will serve the purpose of collateral.
However, it is important to note that you will lose the equipment if you fail to repay the debt.
Equipment financing can be used for equipment purchase and upgrades. They cannot be used for other purposes, such as funding emergencies and cash flow gaps.
- Asset finance
Asset financing in the UK is also a type of secured business loan. They enable you to borrow a large amount of money, but your business assets will be secured against the loan. Asset financing is aimed at subprime borrowers. Because lenders can turn to your business assets in case of default, this lowers the risk for lenders. This is why they charge lower interest rates.
Asset financing is ideal when you need money and you are unable to qualify for unsecured business loans. They start from £5,000. The risk of losing your asset is quite high when you make a default.
- Business credit cards and lines of credit
Business credit cards and lines of credit come in handy when you need a small amount of money. However, they allow you to withdraw money based on the limit. Credit cards will require you to pay off the balance in one fell swoop after the bill is generated. You do not have to pay interest if you have an interest-free card.
A line of credit works differently from credit cards. If you often access funds to fund the gap, try considering a line of credit. It enables you to withdraw money based on the given limit. There is no fixed timeframe within which you have to discharge the whole balance. You can pay as and when you want. You will pay interest only on the outstanding balance.
These options are favourable only when you need a small sum of money, for instance, to fund the gap in working capital for day-to-day business operations.
The bottom line
There are various business finance solutions to help fund your business. However, it is intrinsic to understand which option is right for you. For instance, if you need money to fund the cash flow gaps, small unsecured business loans will be the best bet. For a larger sum of money, you will need secured business loans. Understand the pros and cons of all options and then figure out which one works best for you.
