Growing a small business, or keeping it running safely during times of low income, can require sources of small business finance.. Finding the best solution can feel like an enormous challenge. Fortunately, with so many options, being spoilt for choice means you’ll find a finance option that’s suited to your situation. Here, we talk you through many forms of finance for a small business. Which source of finance is best?
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Banks
Businesses have relied on bank loans, and other bank-based finance options, for as long as banks have been around. In fact, a bank loan or business credit card is often the first option that comes to mind when seeking finance.
Advantages:
- Business finance from a bank is usually provided at a relatively low interest rate.
- You don’t have to look far to find a bank that offers business finance. There will be branches in your hometown.
- Banks have advisors that can sit with you to discuss your business needs and the most appropriate Sources of credit finance They also offer more options than many other types of small business finance.
🙁 Disadvantages:
- Many banks require some form of collateral to provide a secured loan. When you run a small business and finance is required to grow, you may not have any collateral to offer. An unsecured loan requires the bank to take a risk, and as a result it will come with a higher interest rate than the alternative.
- If your bank has provided a business loan, repayments will be made on time every month. If you fall behind, you risk your credit score being affected. Damaging your credit score will affect finance approval in future.
Types of products offered:
Sources of funds include bank loans, business credit cards, overdrafts and asset finance.
Why choose business finance from a bank?
It’s likely that you have an existing relationship with a bank. You can easily speak to someone at the bank to discuss your finance options. You’re never far from a branch, and can choose from a variety of different business finance products.
Alternative finance/business loan lenders
Traditional banks are not your only option when you’re applying for business finance. There are many alternative lenders that offer similar services. Often, these can be found and compared through a broker.
Advantages:
- Comparing alternative finance providers means you could access a better deal.
- When you visit a bank, you are limited to their products. If you open your search up to any small business finance company, you can benefit from competition between providers.
Disadvantages:
- In most cases you’re searching for alternative sources of finance based only on statistics and figures. Your personal circumstances aren’t taken into account.
- Providers can vary in quality. It is very important to do your research and make sure you can trust your chosen lender.
Types of products offered:
Sources of small business finance include traditional business loans, peer-to-peer lending, overdrafts, credit cards, asset finance and crowdfunding
Why choose alternative business finance?
A bit of healthy competition never hurt anyone. In fact, by comparing sources of small business finance you can usually find a better deal. As long as you’re careful about who you borrow from, you may find a more suitable option than business finance offered by traditional banks.
Alternative finance/business loan lenders
Merchant cash advance companies
While other forms of small business finance require you to have existing collateral or a clear repayment deadline, merchant cash advance companies operate differently.
With a merchant cash advance, you get the funds you need in exchange for a promise to repay in small percentages of your customer card payments..
Advantages:
- If you don’t qualify for a traditional bank loan, or don’t have collateral to offer, then you may still be approved for a merchant cash advance.
- Your repayments will fluctuate according to your income, so you never need to repay more than you’re earning. If business goes quiet for a while, you don’t need to worry about keeping up with consistent repayments.
Disadvantages:
- Interest rates are often higher than for other forms of small business finance.
- The arrangement may require all of your business income to go directly to your lender through card payments. This allows the lender to take their cut, before sending the rest of the money on to you. As a result, you’ll lose direct control of your income until your debt is repaid. In other cases, card payments are split by your card processing company with a portion automatically sent to your lender.
Why choose merchant cash advance?
For a small business with concerns about repayment rates, a merchant cash advance offers unique flexibility. You won’t need to repay more than you can afford, because repayments are based on a percentage of your income.
Alternative finance/business loan lenders
Alternative business loan lenders
Instead of going to your bank, it’s possible to apply for a loan from another small business finance company. There are many alternative providers which allow you to avoid the traditional bank branches.
Advantages:
- Alternative lenders may provide you with a loan at a lower interest rate than a traditional bank.
- It’s usually easy to apply online with a fast decision.
- There are many alternative lenders to choose from. Comparison sites and brokers can help you find the best deal.
Disadvantages:
- Applying for a loan with an alternative provider is often less personal than applying for a traditional bank loan. You won’t have the same opportunity to discuss your application.
- You’ll need to be particularly careful to choose a valid, trustworthy small business loan provider. If something goes wrong, you can’t just walk into a local branch.
Why choose merchant cash advance?
If you want a fast business loan decision, or lower interest rates, then you’ll have more options with alternative lenders.
Alternative finance/business loan lenders
Peer-to-peer (P2P) lenders
Anyone with funds to spare can invest them with a peer-to-peer (P2P) lender. They can lend it to a small business like yours. You’ll repay the loan, with interest. You get the money that you need to grow your business, while the lender earns interest as you pay back your debt.
P2P lending platforms will split an investor’s money between various lenders to reduce risk. The loan you receive will likely be made up of funds from various investors, though you will only borrow from – and pay back to – one place.
Advantages:
- P2P lending can help multiple small businesses grow at once. If one business has spare money to invest, they can grow their savings by supporting another small business.
- Most P2P lenders operate entirely online, making the application process quick and convenient.
- P2P loan providers usually have invested funds waiting. Borrowers and lenders can be matched quickly, so that the borrower receives their money as soon as possible.
- Lenders usually set, or have control over, the interest rates they charge. Many will undercut providers of traditional loans, while still being able to earn more interest than they would if their money was in a bank account.
Disadvantages:
- The P2P loan application process is not very personal. If you feel that you might need to explain your circumstances, you may need to look elsewhere.
- loans could affect your credit rating.
Why choose merchant cash advance?
A peer-to-peer loan can usually be approved quite quickly, with an automated online application process. Applying for a P2P loan may also support other businesses and individuals acting as lenders.
Alternative finance/business loan lenders
Crowdfunding
When you run a small business and finance is required for growth or improvement, you may choose to source money through crowdfunding.
You’ll need to gain support for your business, project, or idea. Others can then choose to invest money in your venture.
Advantages:
- When you source finance through crowdfunding, you don’t usually need to pay anything back. People are donating the money to a business that they believe in, but will often expect a product or something relevant in return.
- Crowdfunding allows you to see how people respond to your idea. If people like the idea and want to see it succeed, they’ll be more likely to contribute. If they don’t, you’re unlikely to receive the money you need. Crowdfunding offers a valuable opportunity to test the waters before you turn your idea into reality.
Disadvantages:
- You will need to gain support by providing plenty of detail. How will the money be spent? What are the risks? This can feel very intrusive.
- Investors usually expect to see something for their money. If you don’t do what you promised, you risk damaging your image irreparably.
- You may need to provide your investors with something in return for their money, such as goods or services at a later date.
- Crowdfunding websites often operate with an ‘all or nothing’ approach. If you don’t raise the full amount, you will not receive anything at all. You have to be very realistic.
Why choose merchant cash advance?
Supermarkets/department stores
Supermarkets and department stores have branched out into providing a range of finance products. Though these are typically for personal finance, they may be an option for sole traders.
Advantages:
- You’re borrowing from established companies and recognised household names.
- If you borrow using a credit card, you will usually be rewarded with loyalty points or gift vouchers as you spend.
Disadvantages:
- Generally, you’ll be receiving personal finance instead of business finance. This works as a source of finance for sole traders and the self-employed, but not for other businesses.
Types of products offered:
Why choose supermarket or department store finance?
Online only lenders
Applying through an online only lender is often a quick, convenient way to get a small business loan or alternative small business finance.
Online only lenders don’t have branches that you can visit.
Advantages:
- It’s easy to compare various online only lenders using brokers and comparison sites to find the best deal.
- The application process is usually quick and easy, with an instant or very fast decision.
Disadvantages:
- Applying online is impersonal. The lender does not know the details of your business, or have a chance to meet you and discuss your plans in person. Decisions are based on facts and figures, with no chance for you to sell your idea or receive any personalised advice.
- Applying for small business finance through an online only lender comes with risks. It’s harder to take action if things go wrong. You can’t just walk into a branch and ask to speak to the manager. You need to be sure that the company you’re using is a trusted and established lender. Make sure you’re not swept up in a scam.
Types of products offered:
Why choose an online only lender?
Credit unions
A credit union is a non-profit cooperative. They can offer small business finance with relatively low repayment rates.
Eligibility is often based on your physical location or the type of business that you run.
Advantages:
- As a credit union does not make a profit, any earnings are used to improve future finance. This keeps interest rates as low as possible for members – often, considerably lower than a traditional bank loan.
- Credit unions can offer relatively small loans. You don’t need to borrow more than necessary.
Disadvantages:
- Before applying for small business finance through a credit union, you’ll need to find one that’s suitable. You’ll need to join and be approved before you can request a business loan.
Why choose a credit union?
Government
Through the government, you may be able to apply for a start up loan or a grant for your small business. Many local councils have funds for loans and grants, with very specific requirements.
Advantages:
- You may be able to find a low-interest loan or a grant that you do not need to repay.
Disadvantages:
- You’ll need to meet specific requirements. Some funds are only available to certain industries, others to small businesses of a certain size. Others may offer loans and grants specifically for one purpose, such as making your business more environmentally friendly.
- The application process could be complicated, particularly for a grant. You’ll need to have a clear business plan, and submit a detailed application for funding. Many businesses receive rejections.
Types of products offered:
Why choose funding from the government?
Brokers
Brokers do not offer small business finance directly. Instead, they have access to other finance providers to compare them and find the best deal.
Advantages:
- Many providers are compared to find the most suitable and affordable option.
- Some brokers have physical branches, providing the opportunity to discuss your needs and specific circumstances in person.
Disadvantages:
- You may get a better deal by going direct.
- A broker acts as a middleman. You will need to pay for their service, which often means that you will pay a fee in addition to what you’ll owe your lender.
Why choose a broker?
Friends and family
In the search for small business finance, don’t forget that friends and family members can be a valuable source of small business finance. Many will want to see you succeed and may be in a position to offer money. In some cases, they will not expect you to pay any interest or to make repayments at all.
Advantages:
- This can be the most relaxed form of borrowing, without strict repayment deadlines or the threat of a damaged credit rating.
- You may be able to borrow just a small amount, if that’s all you need.
Disadvantages:
- You risk damaging relationships with friends or family members if they expect repayments and you are unable to make them. It’s often far worse to ruin a strong personal relationship than to damage your credit score.
- This option may only be suitable for relatively small loans.
Why choose small business funding from friends and family?
Which source of business finance is best?
There are so many different sources of small business finance. Finding the right option for your business is a very unique experience, and one that requires you to carefully consider your needs and your circumstances.
For further help finding the most suitable source of finance for your business, see our article regarding the 23 best ways to finance a small business.