What Business Finance is Best for You?
When running a business nothing is more crucial than getting the right finances in place. Business finance is complex. There are new products coming to the market and some older methods of business finance are harder to get. More and more businesses are looking at alternative business finance. At Simply Factoring Brokers we are always looking to break down some of the more complicated subjects into easy digestible chunks of information. In our latest blog we are going to compare four popular methods of business finance to help you make the right choice for your business.
1) Business Loan
A popular option among most businesses and normally one of the first things most businesses think of is taking out a £100K business loan to funding your business over the next 6 months for example. There is nothing wrong with this product to be used in your business, however we would suggest that once your 6 months has been and gone you are still left with your monthly payment which has to be met on time or you could incur late payment fees default notices and even asset repossession if the business cannot keep up with the finance payments.
2) Business Overdraft
Again another popular option and often at the forefront when anyone starts a business or your business needs some extra cash throughout the year. This is a great product if you are an established business that needs some funds for a short period of time. The banks can give you the £100K overdraft you need to put the deposit down on that business premises you have been looking at or buy the materials that you need for the new contract you have just won. In certain scenarios this product certainly fills the spot, but in allot of scenarios such as new start businesses, loss making business, businesses with bad credit and in some scenarios certain industry sectors are off limits within some banks internal underwriters. Even if you can get an overdraft the interest charges, late payment fees and with some banks the annual renewal fee can often prove to be a costly facility and more often than not that overdraft you took out as a short term solution can often be with you for years, because its easy to dig a hole but it’s a lot harder to get out of one.
3) Attract an Angel Investor
This one isn’t that much of a mainstream product but still a popular option for some businesses. A hard product to get but if you succeed in getting an investor onboard you often don’t just get their money but their time and advise. Which can be useful by itself having someone to pick the phone up to, and pick their brains on your latest idea. However this commodity does come at a price and often businesses are asked to give up large percentages of their businesses for that start-up capitol you need. In the early stages of your business, giving up a percentage whether that be 5 or 50% isn’t that much of an issue.
If you think longer term 3-4-5 years down the line that percentage you gave away could be worth 10, even 20 times what you got for it in the first place, which by itself is expensive. You could take the view that to get money it will cost you money but additional to this you are giving the investor 2 things, control over what your business does and how you run it and an annual return on their investment based on your company making a profit. Also with investors often having an exit strategy they may sell their section of the business to a third party you don’t know or you may have to buy their percentage of the business by which point that £100K for example is a distant memory.
As we all know any form of finance does come with its own element of risk and each business may be suited to the above 3 products in their own way. However all 3 options above certainly seem a little limited in their reach, every product we have talked about especially 1 & 2 being a little more mainstream, all of them only give you a lump sum that you are left to deal with. Which on its own isn’t a problem but with the way business goes in general the loan, overdraft or capital investment you have been given can often be swallowed in unforeseen costs and once the money is gone its gone.
4) Factoring or Invoice Discounting
This is a more traditional method of business finance and believe it or not the first methods of Factoring started in around the 14 hundreds. As you can imagine the Invoice Discounting process has come on a little since then. The 2 above products both work essentially the same way, you as a business would sell your invoices to a finance company for a small percentage. For that they would pay you up to 80-90% of your invoice and when your customer pays the invoice the funder then pays you the remaining 10-20% whatever the remaining percentage is minus the fee which overall will fall into around 1-2% of your invoice value.
Unlike any other product mentioned or most other products on the market Factoring can support your business long term and all of the upfront cost like staff, materials, office costs so on and so forth can be funded and paid for by this product. So whether you win a contract or even lose one you won’t be left with a massive bill to pay, as you can see factoring is the only product that can grow and shrink with your business. In allot of cases some of the main banks are pushing their customers from the old fashioned overdraft to factoring.
We hope this has helps you make an informed decision if you need to chat about your options, we are more than happy to help Don’t hesitate to give us a call on 0330 134 2826.