Financing your small business

24th March, 2015

Having access to finance when you need it in your business is a great strategy, but where do you go looking for it?

Banks and other traditional options

Banks remain the most favoured option for small business funding. Bank finance can be tricky if you don’t know what to look for, so let’s look at the common types of funding banks offer to small businesses.

If you are seeking temporary finance, then both a revolving line of credit (often referred to as an overdraft) and credit cards are the most frequently utilised. But beware of the catches! The revolving line of credit usually requires some type of security — often mortgage over property and personal guarantees from business owners. Of course, credit cards don’t typically need security or guarantees, but they often come with very high interest rates and can end up a costly option if not managed properly.

To fund asset purchases or longer-term projects, banks will definitely require security and guarantees — these guarantees effectively give the bank the right to take business or personal assets if you cannot repay the loan. That said, the cheapest and easiest way for you to fund your business operations is through improved cash flow. However, that is not always easy, so what other alternatives are there to finance your business?

READ: When does a short-term business loan make sense?

Non-traditional options

More recently, non-finance companies have entered the finance market, and this could provide a real alternative to bank funding. PayPal and Amazon are just two companies that introduced finance to businesses in 2014. Apple will continue to push ahead with Apple Pay, and we have seen increased momentum in crowdfunding and peer-to-peer lending.

Crowdfunding: Crowdfunding is where a project is funded by raising money from a “crowd” of people usually found through dedicated Internet sites. This finance is typically used to fund creative arts projects; however, in recent times we have seen crowdfunding used for small business finance. There are two main types of crowdfunding: the first is rewards crowdfunding, where a product or service is pre-sold prior to the launch of the business or product, and the second, equity crowdfunding, is where a share in the business is offered in return for funds.

READ: How to calculate and increase owner’s equity

Peer-to-peer lending: With peer-to-peer lending, funds are provided from various unrelated individuals, or peers. The loan is unsecured and can be sold. Although originally offered in the U.S. for personal use, this type of lending has gained momentum, and there are a number of Internet sites that are offering peer-to-peer lending for business.

Although we are hearing much more about these alternative finance options, I don’t think there will be a large shift away from bank finance in any time soon. However, it is nice to know that we may have a larger playing field in which to source business finance in the future.