FINANCING YOUR BUSINESS

All businesses need finance. New businesses find it difficult to raise finance because they usually have just a few customers and many competitors. Lenders are put off by the risk that the start-up may fail. If that happens, the owners may be unable to repay borrowed money.

Why business needs finance:

  • Start upa business, eg pay for premises, new equipment and advertising.
  • Runthe business, eg having enough cash to pay staff wages and suppliers on time.
  • Expandthe business, eg having funds to pay for a new branch in a different city or country.

Types of Finance:-

Some sources of finance are short term and must be paid back within a year. Other sources of finance are long term and can be paid back over many years.

Internal sources of finance are funds found inside the business. For example, profits can be kept back to finance expansion. Alternatively the business can sell assets (items it owns) that are no longer really needed to free up cash.

According to Time Period

Sources of financing a business are classified based on the time period for which the money is required. The time period is commonly classified into following three:

LONG TERM SOURCES OF FINANCE / FUNDS MEDIUM TERM SOURCES OF FINANCE / FUNDS SHORT TERM SOURCES OF FINANCE / FUNDS
Share Capital or Equity Shares Preference Capital or Preference Shares Trade Credit
Preference Capital or Preference Shares Debenture / Bonds Factoring Services
Retained Earnings or Internal Accruals Lease Finance Bill Discounting etc.
Debenture / Bonds Hire Purchase Finance Advances received from customers
Term Loans from Financial Institutes, Government, and Commercial Banks Medium Term Loans from Financial Institutes, Government, and Commercial Banks Short Term Loans like Working Capital Loans from Commercial Banks
Venture Funding Fixed Deposits (<1 Year)
Asset Securitization Receivables and Payables
International Financing by way of Euro Issue, Foreign Currency Loans, ADR, GDR etc.

Long-Term Sources of Finance

Long-term financing means capital requirements for a period of more than 5 years to 10, 15, 20 years or maybe more depending on other factors. Capital expenditures in fixed assets like plant and machinery, land and building etc of a business are funded using long-term sources of finance. Part of working capital which permanently stays with the business is also financed with long-term sources of funds. Long-term financing sources can be in form of any of them:

Medium Term Sources of Finance

Medium term financing means financing for a period of 3 to 5 years and is used generally for two reasons. One, when long-term capital is not available for the time being and second when deferred revenue expenditures like advertisements are made which are to be written off over a period of 3 to 5 years. Medium term financing sources can in the form of one of them:

  • Preference Capital or Preference Shares
  • Debenture / Bonds
  • Medium Term Loans from
  • Financial Institutes
  • Government, and
  • Commercial Banks
  • Lease Finance
  • Hire Purchase Finance
  • Short Term Sources of Finance

Short term Sources of Finance

Short term financing means financing for a period of less than 1 year. The need for short-term finance arises to finance the current assets of a business like an inventory of raw material and finished goods, debtors, minimum cash and bank balance etc. Short-term financing is also named as working capital financing. Short term finances are available in the form of:

 

 

 

Types of Loans:

1. Unsecured Business Loans

Unsecured business loans are designed for businesses that don’t have assets to offer as security, like for instance property or capital. This type of loan is ideal for start-ups that operate on low resources or in small teams.

Good for Be aware of
·         Borrowing between £1,000 and £100,000.

·         Flexible repayment options.

·         No risk to your assets or need to provide equity.

·         Higher interest rates than secured loans.

·         Your business credit score will be a factor of approval.

·         Personal guarantees may be required.

2. Secured Business Loans

In contrast, a secured loan, also known as a homeowner loan (when applying for mortgages), is a credit agreement any assets owned by the borrower.

Good for Be aware of
·         Borrowing larger amounts.

·         Low interest rates and longer payment terms.

·         Easier to obtain if you have a limited credit history.

·         Non-payment could result in the loss of secured assets.

·         Interest rates are more likely to be variable.

·         Personal guarantees may still be required.

3. Short Term Loans

A short-term business loan is ideal if your business needs a quick cash injection or help to support a new project.

This type of loan usually has a term of six-months, so it will need to be repaid quickly.

Good for Be aware of
·         Borrowing small amounts to cover cash flow issues.

·         Normally a quick and easy application process.

·         Quick decisions. The funds can be in your bank within hours of applying.

·         Higher interest rates than longer term loans.

·         High repayment amounts in the immediate term.

·         May require evidence of turnover or trading history.

4. Merchant Cash Advance

A merchant cash advance is recommended for businesses that need short payment terms with small, regular payments.

Essentially, it's an unsecured advance of funds based upon future profits/sales.

Good for Be aware of
·         You know the exact amount you have to pay back from the outset.

·         Your payment amounts adjust to the trading performance of your business.

·         Keep all of the income from your non-card transactions.

·         Relatively high loan costs.

·         No defined end point to repayments.

·         Amount of funding available is limited to 1 or 2 times monthly card revenue.

5. Revenue Advance

A revenue advance product provides you with flexible funding that you repay based on future sales.

Good for Be aware of
·         Flexible payments that adjust during good times and bad.

·         You know the exact amount you have to pay back from the outset.

·         Relatively high loan costs.

·         No defined end point repayments.

·         Amount of funding is limited to 1 or 2 time’s total monthly revenue.

6. Asset Finance

Using asset finance essentially means taking out a loan to buy or lease assets needed for your business to thrive.

Depending on the nature of your business, the assets concerned could be anything from office equipment to vans.

Good for Be aware of
·         Can be used for any type of asset, vehicles, property, equipment etc.

·         Fixed term and payment amounts.

·         Multiple finance types available such as finance lease and hire purchase.

·         More expensive than buying the asset outright.

·         Deposits and payments may be required up front.

·         You may not be able to cancel or alter an agreement once entered into.

7. Trade Finance

Trade finance is used when you sell goods overseas or even domestically, the lender advances you payment for those goods and essentially takes ownership of the goods while they are in transit. The lender then releases the goods to the buyer upon payment.

Good for Be aware of
·         Helping businesses that deal with goods in transit.

·         Unlocking cash flow tied up in large goods purchases.

·         Up to 100% of the value of eligible purchase orders.

·         A property security is sometimes required.

·         Items may need to be pre-sold and typically finished products.

8. Invoice Finance

Invoice financing is where a third party agrees to buy your unpaid invoices for a fee. Invoice financiers can be independent, or part of a bank or financial institution.

Good for Be aware of
·         Unlocking immediate cash flow tied up in invoices.

·         Quick application and approval process.

·         You only pay interest on the money you borrow.

·         Generally more expensive than other unsecured lending options.

·         The credit terms that the invoice financier will accept.

·         Normally a fixed length contract.

Different Loan Classifications:

A Business Overdraft

A business overdraft is a facility attached to a bank account. An overdraft occurs when you make a transaction for an amount greater than the balance in your account. The bank then extends credit up to a maximum overdraft limit and you can make withdrawals up to that limit. Interest is charged on the fluctuating daily balance, but the overdraft balance does not need to be repaid within a set timeframe. The timeframe for arranging an overdraft will vary, depending on the stage of readiness of the business and the size of the facility.

Advantages

  • Suitable for short-term borrowing needs
  • Generally easy and quick to arrange, with immediate access to funds once the facility has been agreed
  • There is usually no charge for clearing the overdraft earlier than expected
  • Interest is paid only on the overdrawn balance
  • Funding is not dependent on giving up a share of the business
  • Interest and arrangement fees are normally tax deductible

Disadvantages

  • As with other types of debt, if the overdraft is secured and the business fails to repay, the lender may take action to seize the security provided for the facility.
  • Failure to pay the interest charges or go back into credit on a regular basis can lead to a fall in credit score, increased interest rates for existing and future borrowing, collateral being seized and legal proceedings against the company. Company directors may also be personally affected, depending on how the facility was structured.

 

Bank Loans

Bank loans are one of the most common forms of finance for small and medium-sized businesses. They are provided at a cost, which is the interest on the owed amount. Other fees and charges may apply, depending on the type of loan and on the lender. Interest is charged and will vary depending on risk of default. The most common types of interest rate will be fixed or variable.
Advantages

  • The loan amount, length of term, repayment schedules and type of interest rate can be tailored to suit the business, including both cash flow and income generation.
  • Interest and arrangement fees are normally tax deductible
  • Making timely loan repayments may improve the business’s credit score.

Disadvantages

  • Not as flexible as short-term solutions, such as an overdraft. For example, if the loan is repaid early, additional fees may be applicable.
  • As with other types of debt, if the loan is secured and the business fails to repay, the lender may take action to seize the security provided for the loan
  • A loan is not flexible and may not provide the best use of capital for businesses with fluctuating finance requirements
  • Defaults on loan repayments can lead to a fall in credit score, increased interest rates for existing and future loans, collateral being seized and legal proceedings against the company.

 

Credit Card

The most common form is the corporate credit card, which is very similar to the personal credit card; purchases are made on credit guaranteed by the card-issuing bank, while the cardholder is given a grace period to pay the issuer the balance spent. If used sensibly, business credit cards help bridge short-term funding gaps and manage expenditure.

Advantages

  • Easy to monitor and manage expenses of employees.
  • Reduces the need to keep petty cash.

Disadvantages

  • Unsuitable for long-term borrowing due to high levels of interest.
  • Potential for fraud

Peer2Peer

Peer2Peer lending is a relatively new option for businesses, where a company such as SocietyOne or BigStone act as a facilitator between individual borrowers and investors. The Peer2Peer lending companies charge a fee to act as the facilitator of the loan and simply connect individuals or businesses in need of a loan to potential investors. Investors can offer secured or unsecured loans with varying loan terms, depending on the constraints decided on by the facilitating company.
Advantages

  • The interest rates can be lower compared to traditional banks
  • The terms can be more flexible
  • Faster loan approval

Disadvantages

  • Finding an investor to put up the loan amount is not guaranteed
  • There is a limit on the amount that can be borrowed via a P2P platform

Angel Investor

 

A business angel is a wealthy individual willing to take the risk of investing in SMEs. One limitation is that these individuals are not common and are very often quite particular about what they are prepared to invest in. Once a business angel is interested they can become very useful to the SMB, as they will often have great business acumen themselves and are likely to have many useful contacts.

Family and Friends

 

This is potentially a very good source of finance because these investors may be willing to accept a lower return than many other investors as their motivation to invest is not purely financial. The key limitation is that, for most of us, the finance that we can raise personally, and from friends and family, is somewhat limited. Further to this point, if loans are not paid back on time to friends and family, it has the potential sour the relationship.

CONCLUSION:

There are numerous options of finance now, only requirement is your intention and repaying plan should be strong.One should opt for any of the options intelligently and use them properly by making regular repayments of loans.We at Consultaxx help people plan business and also help them get best finance , in available options.Feel free to ask for any consultations.

Above article is a mixture of knowledge of writer which he has obtianed through his education and experience and also from various articles available on internet.Above article is only for information purpose.

 

 

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