Every business, big or small, needs a good cash flow in order to thrive. Without working capital, businesses cannot operate, much less expand. So whether you have already started a business of your own or are still in the process of developing one, you will surely need financing for it – and this is where several financing options come in.
What you should know
The financing options you can take advantage of depend on several factors, which include how much money you need, what your existing revenue is (if you are already in operation) or whether you are an entirely new business, whether you are willing to use your personal property or assets as collateral, and whether or not you are the owner of your business establishment or are renting.
Your options for financing
Financing options for your small business include loans, investment financing, invoice financing, and more. Following is a list of these options and a brief summary of what you can expect when you avail of these financing options:
- Business loans
A business loan is one of the most common financing options for any type of business. With a loan, you are simply borrowing credit from a financial institution, such as banks, other businesses, or private financing providers. Loans usually include interest and the interest rate will often depend on how much you have borrowed, how long you will make use of the loan, and whether or not you have security for the loan in the form of your personal property or other assets. Furthermore, the interest rate for a business loan can either be fixed or variable. If it is fixed, this means that the interest rate will be a set amount for the duration of the loan, and if it is variable, this means that the interest rate will adjust according to the base rate of the Bank of England.
- Investment financing
Another common financing option is investment financing, wherein you sell shares of your business to potential investors. Whilst investment financing entails some effort (since you have to find investors and explain to them what your business is all about, amongst other things), its advantages are that you do not have to repay the money that investors provide, and you do not have to deal with any interest as well. The investor will simply take shares of the profit your business makes. However, some disadvantages are that you will own smaller shares in your business, and you may have to consult your investors whenever you are planning to make any big decisions.
- Invoice financing
It can be said that more and more businesses today are resorting to more innovative financing options like invoice financing. With invoice financing, a third party (such as a finance provider like www.ashleyfinance.co.uk) simply agrees to purchase your invoices which are still unpaid. This type of service comes with a fee, but it can be a good solution to augment your existing cash flow.
You should know that there are two kinds of invoice financing you can avail of: factoring and invoice discounting. With factoring, the financier will be the one responsible for your sales ledgers and will also be responsible for collecting the payment from your clients. Invoice discounting, on the other hand, means that the financier will not be managing your ledger or collecting payment from your clients. Instead, they will simply lend you cash depending on the amount of your invoices which are unpaid. The beauty about invoice financing is that you do not have to use your assets as collateral, as you are simply getting an advance based on your already existing invoices.
Kidal Delonix is a contributor to Mr. Hoffman's blog. The views and opinions are entirely his/her own and may not reflect Mr Hoffman's views.
