In the latest edition of the re-branded SMTA magazine Scots AUTOSCENE (formerly Auto Insight), we pair up with the team at Breadalbane to discuss various business funding options for company owners.
Funding options for your business
Securing funding is something many businesses are likely to require, regardless of the stage of their business. Funding can come in many forms, each with its own advantages, disadvantages and considerations. The type of funding, and where this is sourced from, will depend on many factors – what the funding will be used for, eligibility requirements, repayment terms, risk, etc. Â It is essential for business owners to carefully consider the most suitable financing strategy for their business, taking into account their overall borrowing needs. In this article we explore the most common forms of business funding.
Bank finance
Banks usually provide an overdraft and may be willing to lend in the long-term where that lending is secured on assets such as land and property. However, raising medium-term finance to fund operations is often more difficult for SMEs as banks are traditionally more conservative. Unfortunately, this leads to many business owners financing medium-term assets with short-term finance like an overdraft which is expensive. It also becomes a higher risk prospect if the bank requires a personal guarantee from the business owner.
Business loans
Whether you want to help your business expand, buy new equipment or even cover periods of irregular income, a business loan is another option. These broadly fall into two categories – unsecured and secured, and are normally repaid with interest over a set term. Unsecured loans are when your business borrows money without using its assets as security, whereas secured loans use assets as security. The amount you can borrow depends on the value of the assets. If the repayments aren’t made on a secured loan, the lender can sell the asset to get their money back. Unsecured loans will be dependent on the creditworthiness of you and your business.
Asset finance
Asset finance enables the business owner to free up cash flow by spreading the capital costs of purchasing new and used assets. This could mean acquiring the latest equipment and technology to build competitive advantage while spreading the cost of the asset over a longer period, reflecting the economic life of the asset. Funding for certain assets may be more specialist and engaging in the services of a finance broker who has experience in your sector will likely provide access to multiple funders. This approach could provide more competitive products and options than just approaching a single lender.
Invoice finance
This method of funding allows the business owner to borrow against the value of their unpaid invoices by selling unpaid invoices to a third-party company at a discount in exchange for immediate cash. Invoice factoring is borrowing money worth a percentage of the value of your invoices where the lender collects the money directly from your customers to take its share. Invoice discounting is where the borrower collects the payments then pays the lender for the service. This type of funding is only recommended as a short-term solution and is often more expensive than an overdraft. However, as the business grows, their outstanding invoices will increase and so the amount they can borrow rises.
Peer-to-peer loans
Peer-to-peer (P2P) loans are typically made from a group of private investors who pool their money and lend it as they wish. Although there may be less scrutiny than you would find through a bank with this type of lending, interest rates can be high. Also worth noting is that P2P lending isn’t covered by the Financial Services Compensation Scheme (FSCS).
Crowdfunding
Crowdfunding platforms allow businesses to raise funds from a large number of people, typically through online campaigns. There are different types of crowdfunding, including rewards-based, equity-based, and debt-based crowdfunding. However, investors could have little security for their investment if the business fails as crowdfunding is sometimes used when all other types of funding have been unsuccessful as the project is deemed high risk.
Government grants and loans
A good place to search for funding options is the Find Business Support website which lists the current schemes that are in operation.
The list includes options from organisations like Scottish Enterprise, Business Gateway, Skills Development Scotland and councils. Opportunities include the Regional Selective Assistance (RSA) fund that is designed to support projects that will help create or protect jobs.
Professional support
Your accountant can help by working with a finance broker e.g. Breadalbane who have a long tradition of working with dealerships and garages across the U.K to provide funding solutions.
Finance brokers have access to a network of funders and provide competitive, straight forward options for business owners to meet their financing needs for asset purchases. Breadalbane’s specialist brokers are experienced in the motor trade, providing effective solutions for funding complex assets and a dedicated one-point of contact for their clients and network of partners. Their projects have included securing finance for purchasing MOT test station equipment, garage fit-outs, ramps, etc, as well as helping secure finance for dealerships’ commercial customers.
If a business is looking to raise cash for growth or to create working capital, finance brokers have various routes to market on this depending on the business profile and requirements. Their panel of loan funders can provide unsecured loans on a term ranging from 1 to 6 years. These loans can be settled early without incurring any charges. There is also a refinance product, whereby they can release equity tied up in assets on the company’s balance sheet to raise working capital. This can be a cost-effective, flexible and accessible means to raising cash or consolidating debt for a business.
We can provide advice and support in securing business funding for your business. Get in touch at info@thomsoncooper.com for a free consultation.