How to Grow Your Business Using the Power of Finance
As a business owner, you know that it's not always easy to get the capital you need to grow. Whether your business is starting up or has been around for many years, it can be difficult to find ways to expand and thrive without enough capital to invest in your business.
With such a wide range of finance options to choose from such as loans, credit cards or asset based lends, it can be difficult to find the right one that suits your specific needs or circumstances.
Having expert input can be very helpful when choosing the right finance product, the right lender and can maximise your chances of being approved. One of the best methods of doing this is using a good finance broker.
Understand the Basics of Financing
There are two main types of financing: Debt and Equity.
Debt financing (business loans) means borrowing money from lenders who charge interest on the amount borrowed.
These types of loans tend to have terms from 3 months to 5 years but can be longer in some cases. These types of facilities are generally available without tangible security and usually the only requirement is personal guarantees from the owners/directors of the business.
However, there are other types of facilities available such as secured borrowing, which does require providing security in things like property.
Debt financing can be a good option if you that have been trading for more than 12 months and need extra funds to expand your operations or invest in your business in order to grow.
Equity financing (investors) means selling shares or ownership in your business to investors. These investors will pay you for part ownership of your company.
This can be a good option if your business is relatively new, is within the product development stages or if you do not want to have monthly loan repayments. If you do choose this option, then the investor(s) will own a percentage of your business and is due their percentage of profits/dividends at the end of each financial year.
When choosing the right finance option for your business, it's important to consider:
- What type of business you have?
- What is your credit score?
- How much money do you need?
- Do you have any other sources of funding available - where would these come from and how much might they cost?
- Do you need to borrow on a secured or unsecured basis?
- What the funds will be used for and how they will benefit your business.
The answers to these questions will influence which finance route is the best fit for you and your business.
For example, if you are operating in a new emerging market, have little or no trading time and need large borrowing amounts, then equity finance may be the best option for you. This is because it could be less attractive for a lender to lend to your business.
This is because you may find it difficult to be approved for debt financing.
On the other hand, if you are a well-established company, have stable accounts and a good credit profile, then debt financing may be the better option.
Common ways to finance your business
Business loans are one of the most common methods used by businesses to grow. They allow your company to use money from another source (typically a bank or other financial institution) to pay for various things such as purchasing equipment, setting up operations, or paying off debt.
While this may seem like a great idea at first glance, there are many different types of loans available, and each type has its own set of pros and cons.
- Unsecured finance is a very popular option for many business owners. Unsecured loans do not use asset as security. Unsecured loans are usually quick to arrange as there is minimal paperwork and no asset valuations (please note Personal Guarantees are generally required)
- For VAT and tax liabilities many businesses opt to apply for VAT and tax funding to pay their bills without impacting on cash flow, allowing you to use your cash reserves to promote growth and spread the cost of HMRC liabilities
- For new assets there are a range of asset finance facilities available to allow businesses to invest in new assets that they may not be able to purchase with current cash reserves.
- If you are looking to invest in your business to increase efficiency or expand into new markets, there are specially tailored business development loans to allow you to do this.
- For a quick cash flow boost, there are a range of cash flow loans available to increase readily available.
Although this isn't an extensive list of loans available, it is a good overview of the most common types of finance used by UK businesses.
Using investors to raise funding through equity finance is a common form of business finance. Investors actively seek to invest in new starts and high growth markets with the aim to see a return on their investment.
When someone invests in a company, they may be looking for equity or profit sharing - which means that they will receive shares of ownership in exchange for their investment.
Other investors may be looking for interest payments from loans or fixed payments from equity investments such as stocks or bonds (which can be bought and sold on exchanges).
As an entrepreneur, it's important to understand these concepts so that you can make informed decisions about how much funding is needed and whether or not it makes sense financially.
If you're looking for fast access to capital to fund your business growth, then credit cards are a possible option.
Credit cards let you borrow money from a credit card company and pay it back over time with interest charges added on top of the original amount borrowed (which is known as carrying debt). There is compound interest charged on credit cards, which is something you need to factor in when making your decision.
Credit cards can be a great way to get access to capital quickly when needed - but they also come with relatively high interest rates and limited borrowing amounts.
Having high credit card debts can make it difficult for you to access business loans due to affordability assessments.
Which is the Right Type of Loan for You
If you choose to borrow money, you need to decide whether you will take out a loan with a bank or an alternative lender. Many business owners first step is to contact their banks, as they already have dealings with them, and the bank knows about their financial status.
While this is a great choice for many businesses, you are not guaranteed to be approved or to get the best deal for your business.
As with anything, it is a good idea to shop round, researching High Street Banks, challenger Banks and specialist finance houses. You may also consider using a finance broker as a good broker will be able to tailor your requirements to a lender and facility.
Whilst RLA Capital cannot offer financial advice, we can provide various business loans to assist with cash flow. RLA Capital would recommend speaking with your accountant if you are experiencing cash flow problems.