How to raise funds for your small business
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Running your own business is probably the best decision you ever made, right? You have complete control to create your vision, you can work in a flexible way from your sofa and be your own boss. But anyone that runs a small business will know that tackling the numbers is often the trickiest part - especially when it comes to funding it and getting things off the ground.
Sometimes you need a little helping hand to get the ball rolling and sometimes, traditional bank loans aren’t the right choice for everyone. So, what alternative forms of finance are out there to turn to for small businesses?
Photos - Canva
Unsecured business loans
Let’s start with a simple one. An unsecured business loan is exactly what you’d expect. Whereas a secured loan uses assets such as real estate or equipment to fall back on should things not work out, an unsecured loan is based purely upon your ‘creditworthiness’. If you don’t own many assets for your business, which many small and at-home business owners don’t, this could be a good way to get finance quickly. Lenders will often ask for a personal guarantee to cover their back, but watch out - overall costs are usually higher due to the heightened level of risk.
Crowdfunding and peer-to-peer lending
These are two similar, but also quite different products. There’s two different types of crowdfunding; reward-based crowdfunding and equity-based crowdfunding. Reward-based crowdfunding is when lenders invest in your business and instead of repaying them, you offer them a reward of some kind. Let’s say you’re launching a product range of some sort. You could offer your lenders a lifetime of free or discounted products.
Equity-based crowdfunding is when you offer shares in your business in exchange for an upfront investment loan. It’s a slightly riskier way of funding your business, because it depends on you being successful. If you’re not, the shares won’t be worth anything and the business will have nothing to repay.
Peer-to-peer lending is a popular option because it’s lower risk for investors. It gives you access to investors who are willing to lend their own money for an agreed interest rate. This cuts out the middleman and means that you can avoid high interest rates and the extensive financial checks from the bank. The only thing that you need to be aware of with this, is that it’s not secured by any government guarantee.
Invoice finance
Now, this one appeals to many small businesses as we all know the annoyance of waiting on invoices that haven’t been paid on time. With invoicing finance, a third party agrees to buy your unpaid invoices for a fee, meaning that you can maintain a steady cash flow.
There’s three different types of invoicing financing; invoice factoring, invoice trading and invoice discounting. With invoice factoring, your invoice financier will ‘buy’ the debt owed by the customer when you raise an invoice. They take a percentage of this debt as interested and this is where they make their money. They make the remainder - usually around 85% - available upfront, leaving you with a steady cash-flow and the financier with a cut of your sales.
Invoice trading is similar to invoice factoring, but it instead uses online platforms to allow businesses to bypass traditional financiers and obtain finance from individual investors instead, a little like peer-to-peer.
And lastly, there’s invoice discounting. This is when the invoice financier doesn’t manage your sales ledger or collect debts on your behalf. They instead lend you money against your unpaid invoices for a pre-agreed fee. You’re free to collect your debts and remain as the point of contact for your customers, meaning the fact that you’re borrowing money can stay confidential.
I hope you’ve read this and picked up a financing method that you think would work perfectly for your small business. Traditional bank loans aren’t the only way to fund your business and alternative finance shouldn’t be disregarded. As long as you’ve done your research, you’re not taking big risks and you always read the small print, there’s no reason why alternative business finance can’t be the ideal route for you.
To learn more about these finance options and more, check out Choice Business Loans. If you’re not sure which option would work best for you, they can help you decide.
This is a collaborative post.
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