Sources of business finance in the Covid-19 economy

Sources of business financeNo longer can you only acquire funding for your business via a business loan from a high street bank, those days are gone and you have many alternatives to consider now. Business owners have far more options these days when it comes to funding their projects, and so they can often find the greatest financial solutions for themselves with far more ease.

However, if you’re still struggling to wrap your head around it all and are not completely sure what the best funding route to travel down is, you can view our list below, which aims to tell you everything you need to know about business funding in the current economy. Here is our list of funding sources that are available to you, as well as the pros and cons of each of them in order to paint a fair and clear picture:

Bank Loans

Perhaps the most traditional source of business finance, a bank loan will lend a business money based on its value, perceived ability to actually pay back the loan and the business plan it has attached to it.

It is best suited to businesses with a positive credit history and those that are seeking a lump sum of money, but are not in desperate need of it instantly.

Pros: When applying for a bank loan, you’ll know that you’re filling out an application form for something that is both reliable and widely trusted. When lending from a bank you can receive large sums of money over long periods of time, often with interest rates that are pretty reasonable. This is a good source of funding for expensive purchases, or to expand any business with a good credit profile.

Cons: Bank loans are designed in such a way that doesn’t consider the needs of smaller seized businesses. The loans offered by banks can often be difficult to obtain without a top quality track record or valuable collateral, couple this with some very rigid terms and conditions and it all equates to a product that smaller businesses simply struggle to get a hold of.

Business credit cards

Business credit cards are a highly convenient method of business financing, though you should be aware that they can leave your company more vulnerable to both theft and fraud.

It is best suited to busy businesses that are in a rush to get funding, particularly for everyday expenses, such as new stock and equipment.

Pros: Credit cards are a quick and relatively easy way of sourcing funding when you’re desperate for an extra boost of cash. They’re normally pretty straight forward to acquire and the application process is often an uncomplicated one. Also, this method of funding doesn’t put your assets at risk, thanks to the fact that is is unsecured. As long as you continue to pay in full month after month, the costs should stay relatively low, too.

Cons: There are multiple reasons why business credit cards are often viewed as a risky way of investing in a business. Interest is often high and can stack up quickly if the balance is not paid on time each month, which can lead many people into a trap of always having more money to pay off. You should also know that a credit card is also better used when spending smaller amounts, therefore if it’s a bulk sum of cash you’re looking for, you’re find yourself better off looking elsewhere.

You can also end up with a negative interest rate if you end up going over your limit or making late payments, so please take this into consideration before relying on a credit card to get you out of financial troubles.

Merchant cash advances

A Merchant Cash Advance or Business Cash Advance is a short-term funding solution that is widely available to small and independent businesses online in today’s society. Rather than making payments at a fixed monthly rate, you’ll be paying back an agreed-upon percentage of your customer card payment takings. This basically means that you’ll only be paying the loan back when you’re making money as a business.

This is best suited to seasonal businesses that experience varying customer interaction rates throughout the year and companies that need short-term funding that is easily repayable. You should know that it doesn’t matter if you have a negative credit history when it comes to Merchant Cash Advances, as you can use your card takings as security.

Pros: This source of finance comes with a single fixed amount to repay that never changes, so you’ll always know exactly how much you owe and how close you are to fully repaying the loan. Also, repayments are very flexible as they’re based on the money you earn as a business through your customer card sales (cash takings are unaffected). If your business begins to boom you’ll make repayments faster and therefore owe money for less time, whereas if you’re continuing to struggle as a business, you’ll have a much longer time to pay the money back. When repaying a Merchant Cash Advance, you’ll never have to worry about hidden fees or charges, as there isn’t any.

Cons: Your business is required to have a minimum amount in customer card payments per month, in order to be eligible for a Merchant Cash Advance.

Invoice Factoring

Invoice Factoring  is a type of business finance which releases cash currently tied up in outstanding customer invoices. This business solution is ideal for helping fund expansion plans, improving your cashflow and collect payment from your customers. There are two main types of funding options: factoring and discounting. With factoring the factors provides both funding and credit control. Invoice factoring is simply a way to release the funds that’s tied up in your unpaid invoices. Instead of waiting for your customers to pay, you borrow against the money you’re owed and is a type of debt financing.

Pros: This is another flexible financing solution. The amount that a business can borrow increases as sales increase. Furthermore, the loan is unsecured, which means that your property will never be at risk, as it may well be when taking out a high street bank loan. One other benefit of Invoice Factoring is the outsourcing of operations when collecting payment from your suppliers, as the factoring company takes this on, as well as the risk of them not paying on time or at all.

Cons: Factoring can be risky in certain situations as the factors legally own your own debts, meaning any invoices you raise are counted as their assets.

Crowdfunding

Crowdfunding is a funding method that has largely grown in popularity over the past few years. It is ideal for those out there whom are looking to finance new ideas and creative projects. You can sign up to a crowdfunding website, tell your story, lay out what it is you’re looking to achieve and set a financial goal you’re looking to reach. You’ll then need to promote your own campaign to try and obtain donations.

Pros: A good credit history is not a requirement for this style of funding method, so if you’re failing to secure a loan because of poor credit, this could be an alternative that works for you and your business. Also, if you manage to create a good campaign that receives a lot of donations, you’ll have buzz around your project, giving you an instant audience to interact with and potentially make money from.

Cons: It will likely be difficult to raise the funds you’re looking to raise with this method of financing, as there is no guarantee your campaign will even be noticed by anyone. You’ll really need to put your maximum effort into investing into your story, and unless your campaign really takes off and reaches a large amount of people, getting your desired funding may well be an extremely slow process.

Bounce back loan scheme

The Chancellor announced on the 4th May 2020 is making more financing available to the smallest businesses. This support comes in the form of Bounce Back Loans of between £2,000 and £50,000. The borrowing was designed that loans will be 100% government backed for lenders, and businesses can apply online through a short and simple form

According to gov.uk, the government will give accredited lenders a 100 per cent guarantee for the Bounce Back Loans they pay out. The government is also picking up the bill for any fees and interest for the first year, and small business owners won’t need to repay anything towards their Bounce Back Loan in the first 12 months.

After the first year, borrowers will have to pay “2.5 per cent interest for the remaining period of the loan”, according to the government website.

The loans are available for six years to UK-based businesses set up before 1 March 2020. YoIn order to apply for a BBLS a business needs to have been adversely affected by coronavirus to qualify.

25th September 2020 : The Chancellor of the Exchequer has announced an extension to the scheme until 30th November 2020. He also stated a ‘pay as you grow” scheme, this new scheme means loans can now be extended from six to 10 years, nearly halving the average monthly repayment.

Businesses who are struggling can now choose to make interest-only payments and anyone in real trouble can apply to suspend repayments all together for up to six months, without their credit rating being affected.

Coronavirus Business Interruption Loan Scheme (CBILS)

Coronavirus business interruption loan scheme CBILS allows businesses to access financial support interest free for the first 12 months, up to £5million underwritten by the Government across six years. Loans up to £250k do not require a personal guarantee . Loans will not be secured against the Primary Residential Property (PRP). Lenders may offer alternative finance deals and businesses who have had their CBILs application rejected by one lender can apply to another lender.

The Coronavirus Business Interruption Loan Scheme (CBILS) is available for UK companies that have an annual turnover between £1,000 – £45 million. This is a government backed guarantee scheme. However, your business will always remain responsible for repayments of the whole (ie.100%) of the debt.

For lending above £250,000, personal guarantees may still be required but recoveries under these are capped at a maximum of 20% of the outstanding balance of the CBILS facility after the proceeds of business assets have been applied. A principal private residence (PPR) will not be taken as security to support a personal guarantee or as security for a CBILS-backed facility.

Finance sources

Finance sources can actually be split up into three different key categories: personal, external and internal sources of finance. Though commonly include different forms of finance such as, share capital, merchant cash advance, credit card pooling, savings and investments, retained profits and unsecured business loans.

Internal sources of business finance

Funds that are found within the business itself, such as share capital and retained profits, are known as internal sources of finance. These are often used as a way of freeing up cash from within a business, or to generate expansion. Though, sourcing funds from an internal location may require your business to have been trading for a period of time.

External sources of business finance 

Funding that exists solely outside of your company are known as external sources of finance. This method includes the borrowing of money from banks or creditors, etc. Some common forms of external business finance are things such as unsecured business loans, business overdrafts, government grants, venture capital, merchant cash advances and hire purchase.

In this current difficult climate, we’re finding that it is becoming much more common for businesses to look to external sources of business finance, such as lenders as well as other alternative funders.

One last note

The future of this Covid-19 economy that we are all unfortunately currently living in, is likely to be filled with slower growth rates, instability and a large amount of uncertainty for businesses all around the world. You can give yourself an increased chance of success by simply understanding your financial avenues on a more knowledgeable scale, thus gifting yourself an edge over your competitors.

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