No 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 and entrepreneurs in 2021 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 cash flow solutions in the current economy.
Here is our list of different sources of business finance 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.
Regardless if you are limited company, partnership or sole trader, there are a number of types of business finance for you to source and grow your business.
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 money and the business plan it has attached to it.
It is best suited to commercial operations with a positive credit history and those that are seeking a lump sum of money, but are not in desperate need of it instantly as well as making repayments over a medium to long term with a term of typically up-to 5 years.
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 borrowing is 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 as well as startup ventures.
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 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 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 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 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 Advance.
Invoice Factoring is a type of business finance which releases working capital 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. This type of finance is great for a new business, as the risk is placed on the customer not the business owner.
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.
Asset finance is a type of leasing that enables you to access business assets such as equipment, machinery and vehicles without having to invest and buy them upfront. It can also allow you to release value from the assets you already own or use your existing assets as security against a business loan from an asset finance lender.
Business asset finance is typically attractive to businesses who want to put their growth plans into action but don’t necessarily have the ready funds, or business owners who would rather spread large costs over a longer period.
Short-term asset finance also enables businesses to remain competitive by making it easier for them to access the latest technology. Asset finance is a broad category that relates to valuable items in your business.
Pros: Usually a less expensive type of funding to take, tends to feature fewer covenants than other types of financing and those it does include tend to be more flexible. Repay the money as they need to without being constrained by set time frames that are commonly found in term debt.
Cons: Asset-based lending tends to be more expensive than other financing, often three to five percentage points more expensive than a typical commercial lending relationship, however, it is less expensive than cash flow or stretched-term debt in the marketplace, It is considered relatively dangerous to rely on short term assets for long-term debt.
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 and ownership you’re looking to reach. You’ll then need to promote your own campaign to try and obtain donations.
Some crowdfunders offer funding via an equity share, this can be great if you require a sleeping partner in return for their investment.
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.
If you want a short-term finance solution, a business overdraft may be the perfect way to for you to go. A mutually agreed overdraft allows businesses to utilise their present record to make instalments which surpass their accessible equilibrium. To put it another way, the business owes the bank cash when the balance reaches a point below zero.
You can gain any amount up to an agreed limit, which is commonly known as the facility. Organisations can arrange various sums with the bank, contingent upon their need and record of loan repayment. A few banks charge an overdraft office expense, notwithstanding the premium charged on the overdrawn credit. When it comes to larger overdraft facilities, banks may expect companies to set up security as substantial fixed resources, or an individual assurance made by the business’ director.
Overdraft financing is valuable for businesses that occasionally struggle with cash flow issues at certain times of the year. Overdrafts are especially useful to cover transient income deficiencies from seasonal periods. Banks will in general audit overdrafts on a yearly premise.
Interest rates are often pretty high with this type of finance, so be sure to avoid relying on it as a permanent fixture of your business going forward. Banks can renounce an overdraft whenever they wish and request full reimbursement of the owed money. If you are in need of a longer lasting arrangement, consider a bank loan.
Business owners have the chance to utilise a start-up loan to support their new ventures. This type of account is an individual credit upheld by the public authority, accessible to people hoping to begin or grow a UK-based business. Not exclusively do effective candidates secure subsidising, yet they additionally get a year business tutoring, totally free.
Start-up advances can offer up to £25,000 of acquired credit for people beginning a business. The advance has a serious fixed financing cost each year and offers a reimbursement term of 1-5 years.
This type of financing is perhaps the most appealing and accessible to recently formed companies, offering a lot of money, as well as a high level of expertise. You can currently apply on the government website provided that you’re 18, situated in the UK and your business has been active for under two years.
In the case you’re hoping to further develop your business, you may be hoping to put resources into property. Business contracts empower you to get a 70-75% home loan enduring as long as 25 years. For ventures, the sum you can acquire relies upon the rental pay created by the property, up to 65% of the price tag.
Loan specialists consider business contracts higher hazard than ordinary home loans. The financing cost is consequently significantly higher and aren’t fixed rate for expanded periods. All things considered; business contracts offer preferable financing costs over business advances. The premium on your home loan is charge deductible, and you can lease the property to create additional pay to coordinate with expanded financing costs.
Know that home loans are a type of got advance, which means the property fills in as insurance for the bank. On the off chance that you default on your instalments, you’ll lose proprietorship. A few loan specialists require extra security as other fixed resources. It merits utilising a home loan representative to help you track down the best offer, as they’ll encourage you on which suppliers to apply to and can help you track down the most elevated advance to esteem proportion.
With a money rent, the resource account supplier consents to buy a resource altogether and rent it to the business over a fixed period. It works along these lines to enlist buy, the key contrast being that the business won’t ever claim the resource: the aim is consistently that the account company will sell the resource toward the finish of the rent time frame. Every so often, the finance company may offer the business an offer in the deal estimation of a thing when they sell it.
A lease is valuable for larger assets, for example, land or property that you’ll use over longer periods. As you don’t actually claim the resource, it doesn’t show up on your asset report, which can offer some tax breaks. You can balance your rental expenses as a cost against your benefit, permitting you to guarantee VAT. Nonetheless, you should pay for the full worth over the long haul, making it just appropriate for rent over the vast majority of the resource’s life.
Hire purchase (HP) is a type of finance where firms can gain resources through an asset account supplier, who consents to buy an asset that the business needs. The organisation at that point spreads the expense out over the long haul in portions paid to the asset finance company. Possession is moved to the business toward the finish of the renting time frame, when all instalments have been paid.
Hire purchase is a great choice if you don’t have the current funds needed to make an important purchase. It’s a fixed-rate advance with low-financing costs, ideal for resources that you’ll need in the long-term. You can pay a large introductory instalment followed by more modest sums, making it one of the more adaptable financing options. The instalment term is generally 1-5 years, so in the event that you need the money for the time being, you ought to think about a safer alternative, for example, renting.
Toward the finish of the loan’s time frame, you’ll need to pay a last expense, which is a percentage of the resource’s worth. In bookkeeping terms, the resource is treated as though you own it during the rent time frame, which means it will show up on your asset report. The hire purchase sum shows as an obligation on the accounting report, which decreases as the firm makes every HP instalment. You consequently need to consider whether the resource will deteriorate over the long haul, because if it drops in value year after year, your risk remains the same as it was beforehand.
One massive weakness of asset finance is that you don’t authoritatively own the asset until the end of the rent time frame, which means you can’t make any changes to the buy until this time has slipped by. In the event that you need self-governance over the resource, think about different types of money.
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, accredited lenders are 100 per cent guarantee for the Bounce Back Loans they pay out against any losses. The British Business Bank 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 Gov.uk website.
BBL’s 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 individual 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 guarantee or as security for a CBILS-backed facility.
Finance sources can actually be split up into three different key categories: 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, angel investors, family and friends as well as 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.
Frequently Asked Questions :
What are sources of finance?
There are three source types of finance for businesses. Internal, external and personal sources of finance. Internal sources require money to be generated from within the company such as sales. External sources require money to be generated outside the company for example a business loan. Personal sources require funds to be generated privately such as personal loan.
What sources of finance are available to a business during COVID-19?
There are a number of sources of business finance still available. The UK government is currently offering a variety of support schemes to businesses and self employed workers. Alternative finance companies such as PDQ Funding are offering a variety of government backed loans for companies in need. In addition, there are also specialist financial products for businesses during COVID. These include - business credit cards research and development tax relief Asset finance invoice factoring Bounce back loans CBILS Future fund loan
How can I make an application for an external source of finance?
An application for an alternative business loan can be made directly on PDQ Fundings's website. The website application allows a quick and easy online form, once completed you will be contacted with a quotation.