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How to Choose the Right Financing Option for Your Small Business

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Although debt is often seen as a negative thing and something to be avoided, chosen correctly, the right channel of commercial funding could actually be the key to accelerating your company’s growth, easing cash flow concerns, while allowing you to focus on running your business rather than worrying about how to fund it.

Before signing on the dotted line for any finance agreement, however, you first need to ensure that the channel of funding is suitable for your short-term needs while also being appropriate over the longer term. Think carefully about affordability, flexibility, and your capacity to repay any money you borrow.

Understanding Your Business Finance Options

Invoice Finance

Invoice finance is a flexible and scalable channel of funding which is designed to grow with your business. There are two main types of invoice finance, invoice factoring and invoice discounting, and both work on the basis of giving a company access to the cash tied up in unpaid invoices. If you are operating in a sector where late payment of invoices is prevalent, invoice finance could provide an element of certainty and stability to your cash flow position, allowing the business to better manage its outgoings and plan for the future.

Asset Finance

Asset finance facilitates the acquisition of a large business asset such as a vehicle, piece of machinery, or equipment, without having to dip into cash flow reserves to fund the purchase. With asset finance, the purchase will be funded via a series of monthly instalments until the asset is fully paid for, or the lease term comes to an end. For many businesses, obtaining the right equipment can have a hugely positive impact on operations allowing for increased production, reduced costs, or a more effective use of resources, making asset acquisition a smart investment in their business.

Commercial Loan

A straight forward business loan could be ideal for those companies seeking an immediate cash boost. Interest will be charged on the full amount of the loan right from the start so it is important you only borrow what you need to prevent you having to pay interest on money which you are unable to put to good use. Business loans can be obtained from a variety of providers from high street banks, through to specialist lenders; terms, conditions, and interest rates will vary, so it is vital you do your research and identity the most cost-effective way of securing this type of loan.

Identifying the right borrowing option

So now you know more about the possible funding options you could consider, your next step is to decide which solution is right for your company. To do this you first need to determine what you need the funding for; this is because what may be the most suitable option for one company may be wholly inappropriate for another.

For instance, a company looking to bridge short-term cash flow concerns may find a form of invoice finance more suitable for their needs rather than paying interest on a lump sum loan for the next five or more years. Likewise, a company looking to undertake a growth or expansion project is likely to need an immediate injection of funds much more significant than an asset financing arrangement could offer.

Secure the best terms

Once you have identified what type of finance you require, you will then need to take steps to ensure you secure this funding at the best possible price. Interest rates vary across providers as do the term lengths offered. Remember, the longer time period you spread the borrowing over, the more the loan is likely to cost you overall even though each individual monthly instalment may be cheaper.

Thought must also be given to the terms and conditions attached to any agreement, and whether these could prove limiting in the future. Consider whether you may be in the position to make overpayments in order to clear the borrowing earlier, whether you may need to access additional to funds in the future, and whether you are able to refinance the agreement in the event of interest rates falling. Check these possibilities against the terms of the agreement you have been offered to ensure it offers the flexibility you need both now and in the future.

Taking the time to obtain the most appropriate funding option now could pay dividends in the future.

About the Author:

Chris Bristow is a business debt expert at Real Business Rescue, company rescue, restructuring and liquidation specialists with a wealth of experience in supporting company directors in financial difficulty.

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