Businesses typically need funds during their start-up and expansion phases, which can be quite risky. However, despite financial challenges, many businesses still became successful as the owners handled these stages well.
A key to business success is often having access to a good source of funds. Here are some business funding options to consider.
The most common business funding option that many business owners use is their personal savings. In most cases, this is regarded as the safest option because the obligation to pay the borrowed amount is not strict. Also, this doesn’t involve interest.
However, using your savings as a source of funds for the business has a major drawback: you are at risk of losing all your savings if the business doesn’t go well. It can also be messy at tax time. So, while convenient, using your personal savings to fund your business can be a risky long-term strategy.
Taking out a personal loan is also another common way to fund a business. This usually involves borrowing money from friends and relatives. The good thing about this loan setup is that it comes with no or lower interests. In addition, the payment term involved is, most of the time, flexible. The downside is that borrowing money from relatives or friends exposes can be dangerous, as unpaid personal loans are renowned for and ruining relationships. To prevent this undesirable scenario, it’s best practice to place all the loan details into writing to include the amount, term, and exit strategy (i.e. how you’re going to pay the loan back). This should also include what happens in the event that you can’t make payment(s).
Many business owners use their business credit cards to secure funds. Although credit card loans usually have higher interest rates, they are still a widely used financing method because they are easy to pay off when handled well. As long as you can pay the card’s minimum monthly premium on time, you won’t be charged with interest. Though the reality is that, for many business owners, the amount outstanding can quickly build up, which can be very costly as credit cards typically charge high-interest rates.
Getting a business loan can be a good alternative to a personal loan as it separates the company and individual funding, which is ‘cleaner’ from a tax perspective. It also reduces the business owner’s exposure. There are many types of financial institutions that provide business loans including banks, building societies, and increasingly specialist lenders. A perfect example of this is Mango Credit, which has been providing business loans to Australians since 2001. The advantage of a specialist lender is that they’re usually flexible in their lending criteria, require minimal documentation, and are quick to process funding.
Banks can be a good source of business loan funding if your business has been operating for a few years, solid cash flow and a good credit history. The upside of a bank loan is that the interest rates are competitive. The downside is that bank loans often take quite a while to process, and have funds released. The criteria for funding is also usually quite strict.
Invoice financing is becoming an increasingly popular financing option for many business owners as it’s a quick way to release cash flow to offset late-paying customers or just help improve cash flow in general. The way invoice financing works is to enable businesses to borrow money against the amounts due from customers. Businesses then pay a percentage of the invoice amount to the lender as a fee for borrowing the money.
The rise of fintechs and private lenders in Australia have fundamentally changed how a loan can be processed and funds received. And apart from the convenience, many online lenders offer what’s called a ‘Low Doc’ loan (meaning that they only require minimal paperwork). The other good thing with an online loan is that they usually are more flexible with their funding criteria (for instance, will often accept borrowers with a bad credit history) and they’re fast. Like with any type of loan, it’s important to make sure you research all aspects of the loan – particularly the rate and repayment criteria.
A business line of credit is a revolving loan that allows the business access to a fixed amount of funding, which can be used when needed to meet short-term business needs. This financing product is a flexible loan option. This type of financing also provides business owners with autonomy as to how and when they will use the borrowed capital. A business line of credit enables you to pay back some of the borrowed amount or all of it. You are also allowed to re-access the available funds when needed.
A merchant cash advance is a way for businesses to borrow a lump sum and pay it back over time using future sales percentages. This happens through an agreed percentage that is deducted from each transaction made using the borrower’s card terminals until the payback amount is reached. As such, this model is primarily suited to retail businesses.
Equipment financing is a popular funding option for businesses that need to purchase the equipment necessary for their operation, but lack the required funding. Instead of buying the equipment in cash, business owners use an equipment loan to finance the purchase.
Businesses need funding to grow, and this funding can come from various sources. However, before you look out for funds, make sure you have a clear plan on how to use the money and how to pay it back. In this way, you can really be sure that you can get your business to the next level and expand your reach.