What are your options when seeking business finance?

“I believe that through knowledge and discipline, financial peace is possible for all of us.” (Dave Ramsey)

The right finance can make or break a business, and the challenge many business owners face is not knowing the options that are available to them. If you think your business will seek finance somewhere down the track, this post will shed light on your business funding options.

Why Seek External Funding?

There are a variety of reasons why you might seek external finance for your business, including to:

  • ensure sufficient working capital
  • smooth out seasonal slow periods
  • bridge the gap between customer orders and supplier payments or
  • support business growth objectives that may include a new product, a new market, an acquisition or expansion

Whatever the reason, it’s important to select the finance option that best suits your needs. Below is an overview of your business funding options that will provide you with the clarity you require to make an informed decision aligned with your business objectives.

Debt Finance

Debt finance is most commonly known as ‘borrowing from the bank or financial institution.’ It can take many forms which can predominantly be defined as secured or unsecured debt.

Secured debt requires an asset be held as assurance that the debt will be repaid. If you default on the loan, the collateral is forfeited to satisfy the debt payment. A prime example of a secured debt is a mortgage, where the lender has a financial claim on the property until the loan is repaid in full.

Unsecured debt is funding that doesn’t ask for security. This finance is based on the borrower’s creditworthiness and agreement to repay. This funding attracts a higher interest rate because there is no collateral used as assurance. Further, the risk of default and then having to claw back the funds is generally a difficult process. Examples of unsecured debt can include credit cards, bank guarantees or overdrafts. Here you repay the amount borrowed with interest in alignment with dates specified by the lender.

The main benefits of debt finance include the ability to retain control of your business (unlike equity financing) and tax-deductible interest payments. Below we take a high-level look at various forms of debt finance.

Trade Finance

Trade finance assists buyers and sellers across international markets. It smooths out the trade cycle funding gap by speeding up the accounts receivable process for exporters while simultaneously providing the importer with extended credit. Parties that use trade finance include producers, manufacturers, importers, traders and exporters.

Trade finance benefits include: ability to negotiate better terms with suppliers/customers, no impact on existing bank facilities and unlocks accounts receivable sooner for more productive use in the business.

Debtor Finance

This involves an external financial institution purchasing your debts for a fee. Many businesses use debtor finance to smooth out the cash flow issues that can stem from waiting out 30 to 60-day payment terms offered to customers (such as the inability to meet obligations like wages or supplier payments). The most common debtor finance types are:

  1. Invoice factoring: Here the external institution advances 80% to 85% of the invoice’s value as soon as it’s submitted for financing. The remaining percentage (minus fees charged) is released once the invoice is paid in full. With invoice factoring, the external institution also helps manage credit and collections.
  2. Invoice discounting: This operates in a similar manner to revolving lines of financing. Here the institution finances a batch of invoices, advancing 80% to 85% of their total value to the business. This line is then adjusted as customers pay their invoices and the business raises new invoices. With invoice discounting, the external institution doesn’t help manage credit and collections.

Debtor financing benefits include: improved cash flow, the ability to offer longer payment terms to avoid potential customer loss to competitors and it’s a flexible finance method, directly correlated to your sales.

Asset Finance

Asset finance is used by businesses to obtain the equipment they need for growth. From machinery and furniture through to fit-outs, technology, vehicles and more, asset finance covers the entire spectrum. As asset finance covers such a wide array of items, it’s natural that there are numerous options, each best suited to differing commercial situations. These include: commercial hire purchases, leases (financial or operating), chattel mortgages, novated leases and technology rentals. As each option delivers different tax and cash flow implications, it’s important to seek guidance when choosing the one best suited to your needs.

Equity Finance

Equity finance is an alternative option to debt finance. Here an investor buys into your business in return for funding. These investors can be referred to as business partners, business angels or venture capitalists. Whilst you don’t need to repay this investor, they do retain a percentage of your profits and own a share of your business. It’s important to be wary of trading excessive equity in return for finance as you run the risk of losing control of your business.

The main benefits of equity finance include the fact that the investor is committed to your business as their return is tied to its success, and this type of finance can enable faster growth.

Government Grants

Winning any one of a number of government grants can be an easy way for you to fund business growth. There are a myriad of grants available to businesses that include research and development tax incentives, training grants and business growth grants. It’s worth exploring this space to see whether you meet the criteria.

The main benefits of government grants include: the money is available to almost everybody, funds can be used for training to help staff development or research and development to help the business innovate. Most of all, this is money that the Government wants to give you to help you grow your business.

Whilst not an extensive list, this article is a great starting point when you’re getting to know the different forms of business funding available. For further information on how the right finance can help grow your business, contact the team at ABJ Business Solutions www.abjsolutions.com.au or email info@abjsolutions.com.au