Interest rates are growing every day, and that is affecting all of us. It means we are all paying more back on our loans, whether we're taking out personal loans or business loans. Larger businesses fare better, but for small and medium entreprises (SMEs), this can spell big trouble. Small Business knows all about that.
How can your small business offset these rising interest rates? One way is to start looking for alternative finance options. There are all sorts of places one can get financing now, so why not explore some new options that will affect your business less? Let's take a look and see what your options are.
1. Asset finance
What it is: Asset finance is a type of business financing that enables you to either release equity from assets you own or have access to assets you don't have, like vehicles, machinery, or specialised equipment. Operating leases, hire purchases, equipment leasing, asset refinance, and finance leases are all types of asset fianance. If that sounds risky, take a look at what Unbiased has to say - they usually provide good financial advice.
Why it's advantageous: This one's good because it gives you two options: release money from existing assets, so it works like a secured loan, or acquire assets you don't already have, but that your business needs. In addition, you can categorise anything as an "asset", whether it's a vehicle or a dishwasher.
2. Purchase finance
What it is: Purchase finance (or purchase order financing) is when your business gets cash in order to fill orders for customers. Cash flow is a problem, especially for rapidly growing businesses, so in some cases, a company may pay the supplier of a different company for the orders they need to fill.
Why it's advantageous: This is great because it's fast and it gets you out of a scrape. In addition, you don't need to provide collateral or anything, because the company gets their money back from the customer. All you have to pay is the fee the company charges you for the service. All the money leftover goes back to you.
3. Business cash advance
What it is: A cash advance that your business can use in its time of need. To be eligible, your business must operate with credit cards and debit cards, as the repayment will be made directly from income made from this type of payment. Your business must earn a certain amount in income from debit card or credit card transactions. It must also have been in operation for a certain amount of time.
Why it's advantageous: First of all, there is no traditional interest rate. Second, affordability is built-in, as repayment is not made in regular, fixed instalments, like traditional loans. Instead, the money you borrow is repaid in a fixed percentage of what you make daily or weekly from credit card or debit card transactions. That means there is no risk of defaulting or not being able to afford a loan repayment.
4. Invoice finance
What it is: Invoice finance is invoice based lending (invoice factoring, invoice discounting, spot factoring, selective invoice discounting). With this finance solution, a business is able to release funds that are currently aggregated in invoices that slow down cash flow. What happens is the invoice is sold to a third party that gives the company an advance from the invoice funds, until the payment is received. This especially happens when the economy is not great, and no one has the cash flow to cover invoices. Keep an eye on David Smith for more about that. Otherwise, Is4profit has great advice on dealing with late payment.
Why it's advantageous: This is a great, quick solution for when your business is drying up on funds while waiting for cash from a client. You get some money when you need it, and you also receive the rest when the client pays the invoice, minus the fee for the advance you received.
5. Personal loans
What it is: Just like the name says, personal loans are loans you take personally. Yes, this is not business finance per se, because you are applying as an individual, and not as a business. That means that you require your own credit rating, or alternatively, an asset to use as collateral to secure the loan. The business is not actually involved, so there is no selling of invoices or assets.
Why it's advantageous: The benefit of this is that, since it's not in the company name, the interest and repercussions are all in your name. Should you default on the loan, the business will not suffer. You get the money when you need it, but without needing to chip away at the company's value by giving away shares or selling assets.
6. Start-up loans
What it is: Start-up loans are loans that are designed and open to start-ups, specifically. Because most business loans have requirements as to how long the business must have operated to qualify for a loan, this makes it easy to circumvent that and get funding. There are certain requirements to be met, mostly surrounding the amount of time the business has been in operation, etc.
Why it's advantageous: You're not competing with big, established businesses for a business loan, because this type of loan is designed especially for you. That means you are much more likely to be approved. In addition, it's a government initiative, and it ensure that this is a legitimate loan, and that you will not be taken advantage of. This can be a real help for a business that's just starting out. Find out more about it at GOV.uk
What it is: Crowdfunding is a type of capital raising endeavour that involves asking for donations for the purpose of funding a certain project or need. Crowdfunding can be personal or business-related, and it can be used to start a business, or simply launch a new product, for the purpose of paying bills, etc. You use a platform designed especially for this, describe your project and your goal, and people can review it and put however much they want towards your goal. If you'd rather try to save money and not be at the mercy of strangers for capital, consider cutting back on some energy costs - Money Saving Expert shows you how.
Why it's advantageous: This type of funding usually comes with no strings attached. You are not borrowing the money, you are being given the money, so there is no interest, no collateral, and no credit check. Sometimes, people will set up some sort of gesture for people who donate to their cause, like a sample or prototype of their product.
8. Peer to peer loans
What it is: Like the name says, peer to peer loans are loans that peers get from other peers. They work on special platforms that facilitate the connections between people who can afford to and are willing to lend money and borrowers who are in search of a benevolent lender that isn't a bank.
Why it's advantageous: Peer to peer loans are not traditional loans, so there is no bank involved, and typically, the terms of the loan are more lenient. You may be able to get away with a lower interest rate or a longer repayment term, compared to a traditional loan.
9. Equity finance
What it is: Equity finance is when a business raises capital by selling shares (stock) in the company. The funds are used for business purposes, and the shares may be open to family and friends or go for initial public offerings (IPO), which means stock is open to the public. New Model Adviser can help you with selling shares.
Why it's advantageous: You don't need to indebt yourself in order to get these funds, and depending on the size of your company, you may not need to sell a significant stake. Plus, especially if this capital raised is used to increase the value of the company, it's a win-win situation for everyone involved.
As you can see, there is more to the world of business finance than just traditional loans you can get from the bank. If you keep an open mind and do your research diligently, you will discover that your options extend far beyond what you thought was within reach. Sometimes, you have to think outside the box or seek alternative avenues you hadn't thought about before in order to secure financing for your company.