Keeping a business running like a well-oiled machine requires a huge amount of hard work, time and effort. Maintaining a successful business requires constant attention to detail and strategic planning. But above all this, what a business really requires is the funds and financial backing to push things forward. Cash is king and without a successful flow coming in and out of the business, ultimately you will struggle to maintain the success of a business, let alone start one. Likewise, if you are looking to grow and expand you must do some from a healthy stand point.
So, either as a start-up or an established business getting the right kind of funding at the right time is crucial, but aside from a traditional bank loan, what options are there? The most important thing to consider, when assessing alternative means of funding, is the possible implications of not getting the additional finance, could your business suffer? Could it even go down the route of liquidation?
Friends and family
Borrowing from friends and family in principle always sounds like a great idea, but often it doesn’t work out quite so well. There are some massive advantages to borrowing money from those you trust, there is a much more well-established line of communication and you should be able to establish a much more favourable interest rate, as well as a manageable time scale in which to repay any equity. When borrowing from a friend or family, with the trust involved, you should hopefully avoid the use of CCJ’s or winding-up petitions if things don’t go quite so well. However, with the benefits undoubtedly come the pitfalls.
No loan is ever guaranteed to be repaid, this will even be the case if you borrow from a trusted lender. Friends and family could be dependent on you repaying them and if for some reason you weren’t able to, it could have disastrous repercussions for their personal life, not to mention any relationship could be ruined.
Using commercial finance
Commercial finance can provide a fantastic alternative to a standard bank loan. There are lots of different options, with different kinds of packages designed to suit your businesses needs. But when looking at a commercial finance package, you must consider the position of your business and consider what you need from it.
The most common types of commercial finance business use are secured loans, asset finance and refinancing. A secured loan is designed for those who are struggling to get a standard bank loan from a typical lender, as you have a property assigned as security. This means if you fail to repay the loan, your security could be used as collateral. Asset finance is more a means of securing the top equipment and assets without having to pay a large initial lump sum. You pay monthly affordable amounts over a set period of time and finish up with top of the line equipment. Re-financing is for those who are asset rich but cash poor. Just as with a secured loan, you are able to take out a loan based upon the value of your assets, however, you are able to keep the assets and continue to use them.
Angel investors will typically look to invest in businesses during the early stages of their lifespan. An angel investor is normally an individual, looking to invest quickly and early and will then look to have their investment returned as quickly as possible. The difficulty with angel investors is finding them and convincing them to invest, however, as an alternative to a bank loan it can be a much more manageable means of returning payment, angel investors won’t look to withdraw their investment until the business can afford it.
Angel investors can also give you the benefit of experience and advice, offering strategic guidance when it actually comes to spending their money. Whether you’re a sole trader, limited company or even a partnership, having an extra opinion from an experienced source is always vital.
Venture capitalists work in a very similar principle to Angel Investors, but instead of being individuals they are firms, or companies and will actually use other people’s money to make investments. They are entrusted by individuals to make solid investments on their behalf, with the idea being that they see a return on their investment. There is no guarantee venture capitalism will always work, as any investment is always a risk.
Similarly, to angel investors, venture capitalists are ideal when it comes to funding start-ups. They will often look to get early investments into companies that they really believe will be a success. In return for early start-up funding they will look to have a percentage of shares from the company. It can lead to venture capitalists having very long-lasting relationships with their partners. Investing in companies that are already operating, is not something venture capitalists tend to look at it, unless there is a big scope for growth.
Funding is very hard to get right for businesses. Considering all the different options available, finding the right type of funding aside from a traditional bank loan can be incredibly difficult. You must consider what your business is trying to achieve and look at the long-term plan, in terms of how you can repay the loan and is it realistically possible.