By Johan Da Silva, ASC Finance for Business (www.asc.co.uk)
“Many smaller businesses rely on established relationships when considering finance options” – this is a direct quote from a recent report from the British Business Bank, which states that 75% of SMEs only considered one finance provider in the last year.
That is great if you have a relation- ship with a lender who can provide your business with the right finance – but not so useful if you don’t.
Many small businesses are not always aware of the different options that could be available to them, and therefore can miss out on finding the right finance – simply because of this information gap.
The commercial finance market is extensive, and some products are not always easy to understand, but knowing what type of products are available is a first step to accessing them. We set out some of the key options below:
Working Capital Loans: You have heard the saying – “Cash is King”. A business needs working capital to operate, whether it is for growth, or simply to pay for stock, wages, or other expenses. Working Capital Loans are useful when looking to improve immediate cash flow and can be provided on a secured or unsecured basis.
Secured or Unsecured Business Loans: A secured loan will have your property (or building, equipment, or anything high value) as a security in case you are not able to keep up with the repayments. Unsecured loans are similar but riskier for the lender as there is nothing to back up your loan repayments. Many business loans are unsecured, but to ask for higher amounts it is generally required to have a ‘security’.
Overdrafts: Some lenders can provide a business with an overdraft facility. The limit is often reviewed every year and it has a pre-agreed interest rate. Businesses will be charged only on the amount they use.
Commercial Mortgages: A commercial mortgage is similar to any other mortgage but targeted to commercial purposes. It can be possible to secure lower interest rates as lenders are keen on the security provided by commercial property.
Bridging Loans: A bridging loan is a form of short-term finance where the borrower is awaiting future income (e.g. from the sale of a property, or a long-term loan), but wants to access finance quickly and therefore needs to “bridge” the gap. Bridging loans can be quite expensive, but the key advantage is that they can be drawn down quickly.
Invoice Discounting: Invoice discounting is a specific type of finance which helps businesses with their cashflow. The business effectively sells an invoice to the lender, to get their payment up front. The lender is then repaid once the business receives their income from their customer. This form of finance can be particularly useful for businesses whose clients have long payment terms.
Asset Finance: Helps businesses acquire an asset and spread the cost over time. Asset finance can also free up valuable working capital.
Peer-2-Peer: P2P Finance is a newer way of raising capital. Instead of borrowing money form a single lender, the business effectively takes out multiple small loans from lots of individuals – the provider simply ties all the loans together. It is a way of accessing finance without the need of a traditional bank.
There are many options available to small businesses, but it is important to know which ones are right for you. Applying for finance can be really confusing and this is why it is important to have someone you trust working on your side. Having a broker can help you navigate the process more easily, and there are different hurdles that having a broker can help you over- come.