Cash flow and profit are not the same. Many successful businesses need funding to support working capital and fuel growth plans.
Unexpected costs, slow-paying clients and many other factors can put a strain on your finances. Almost a third of Australian businesses say their available cash would allow them to survive less than three months. When cash flow becomes stretched, you need to explore your funding options.
But getting business finance is a significant challenge, with traditional lenders becoming increasingly risk averse. However, there are several alternative financing solutions to help business owners manage their cash flow and get the capital they need.
Here’s a rundown of the potential sources of funding you can explore when looking for financing.
Debt Finance or Equity Finance
There are two main types of funding that a business can use to secure financing:
The business receives funding from a third-party source and repays the money borrowed plus interest and fees.
A third party provides funding in exchange for part ownership or shares in the business. Within these categories, there is a range of financing solutions designed for different business needs.
Types of Debt Finance
Debt finance is the most common type of funding and encompasses traditional and alternative funding sources. You don’t need to offer any equity in exchange for funding, but you will typically need to repay the sum borrowed plus interest.
A bank loan can provide a large lump sum to cover large purchases or fund the expansion of a business with a strong credit rating. The principal plus interest is repaid over a set period of regular repayments.
Such loans are a very rigid type of funding that is out of reach for many businesses. The application process can last several months, and strict lending criteria mean you will need to submit a detailed business plan, provide collateral and have a strong financial track record.
Business Credit Cards
Business credit cards can support working capital and cover everyday business expenses. They are more accessible than a business loan, but credit card interest rates and fees can be expensive and quickly mount up if you don’t clear your balance each month.
Credit cards are typically used to cover small purchases. If you require more substantial funding to pay suppliers, cover overheads or fund expansion, there are more affordable and better-suited alternatives.
Invoice finance is a flexible funding solution that allows a business to turn its outstanding sales invoices into a source of readily available funding. Instead of waiting 30+ days for your customers to pay, you can use invoice finance to receive up to 85% of the invoice value as a cash advance. When your customer pays the invoice, you receive the remaining balance less fees. (Note: Invoice Finance is also known as Debtor Finance or Receivables finance).
Unlike a bank loan, you don’t need to use your home as collateral. There are two main types of invoice finance: factoring and discounting.
This type of funding is available to businesses that sell to other businesses and raise sales invoices for their goods and services.
Asset finance is a type of finance that helps a business to fund the purchase of high-value assets, including new and second-hand machinery, equipment, and vehicles. It can also be used to help a business release the capital tied up in the high-value assets they already own.
This form of financing typically involves hire purchasing, finance leasing and operating leasing. Unlike a traditional loan, the asset the business wants to purchase acts as collateral for funding, so there is no need for property security. The business makes regular repayments over a set period to pay back the principal and interest.
Trade finance is a funding solution that helps importers and exporters to cover cash flow gaps and mitigate the risks involved with trading internationally. It can also be used for domestic trade, along with other solutions like supply chain finance.
By using a third party to finance a transaction, the supplier can be sure they will be paid once the goods are shipped, and the buyer has some protections to ensure they will receive the goods.
Buyers can use trade finance to cover cash flow gaps waiting for shipments and use the funding to negotiate early payment and bulk buying discounts. Suppliers can release the money tied up in goods sold and speed up cash cycles.
Line of Credit
A line of credit allows a business to pay for everyday expenses, cover emergency costs and fund expansion. It works in a similar way to a business credit card or overdraft.
You can draw down on the available credit whenever you need. As you take out funds and make repayments, the available credit limit increases and decreases accordingly.
This type of funding is often used alongside an invoice finance facility. You draw funds as and when you need them and make repayments when you raise and submit a new invoice to the finance company.
Merchant Cash Advance
A merchant cash advance is a financing solution for businesses that process significant volumes of customer card payments. The amount you can borrow is determined by the value of the card payments you process at your business.
Once funding is in place, every time you process a card payment, a percentage of the payment value is automatically used to repay the principal and interest on the sum owed. The amount you repay in a month depends on the value of the card payments you process.
This type of funding can help businesses with seasonal sales cycles, but there are many pros and cons to a merchant cash advance and interest rates are usually higher than other types of financing.
Get in touch with your Whiteroom Finance broker to learn more about your business finance options.
Types of Equity finance
Equity finance covers a smaller range of funding solutions. With equity finance, you will need to give up a stake in your business in exchange for funding. There are no repayments or interest, but you will need to share some control and profits with your investors.
Crowdfunding has become a popular way for start-ups and innovative companies to seek funding. You don’t need to have a strong credit rating or collateral to secure financing, but you will need to create a strong promotional campaign to attract the attention of potential investors.
This is a long-term funding solution. You’ll need to have a compelling pitch and be willing to dedicate lots of time and effort to promote your business. Getting crowdfunding is likely to be a long process, and there’s no guarantee you will raise the funds you need.
Venture capital is a possible funding source for businesses with high growth potential. You’ll need a scalable business plan and to have achieved some success already to appeal to investors. Before a venture capitalist is willing to invest, they’ll want to audit your business, so you’ll need to keep your accounts and business plan up to date.
This type of funding is out of reach for most businesses, with venture capitalists looking to invest significant sums of money in companies with a high chance of producing a large return.
This type of equity finance has some similarities to venture capital. Essentially, you offer shares or part-ownership in your business in exchange for funding. You’ll need a detailed business plan, up to date accounts and growth potential to attract potential investors.
Angel investors typically work alone and use their own money to fund investments. Alongside funding, an angel investor can offer experience, connections, and advice to help you grow your business.
Finding an angel investor can be challenging. You’ll need to attend events, explore mutual connections, and expand your network to increase the chances of finding an investor.
Family and Friends
Mixing business with personal life can create problems, but friends and family may be able to offer financial support to help you grow your business. Many of the most successful companies, including Amazon, were started on the back of a loan from a family member.
If you do seek funding from friends and family, be clear about the terms of the financing. Put together a basic contract outlining the share of equity or repayment terms.
If you would like some assistance choosing the best type of finance for your business, get in touch with the Whiteroom Finance team.
Determining the Type of Business Financing You Need
When you’re determining which type of business finance is right for your business, ask yourself the following questions:
- How much capital do I need?
- How quickly do I need funding?
- What types of funding will I qualify for?
- How much can I afford to repay per month?
If you require regular funding to cover cash flow gaps as your business grows, a flexible Invoice Finance facility could be a good solution. For more substantial business expenses, a bank loan or Asset Finance solution could provide the capital you need.
We offer a range of flexible finance solutions to help businesses access the capital they need to grow. Speak to us today to explore your funding options.