Growing a small business, or keeping it running safely during times of low income, can require additional funding.
There are many sources of finance for small business, and finding the best solution can feel like an enormous challenge. Fortunately, with so many options, being spoilt for choice means that you will almost certainly 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?
- Alternative finance/business loan lenders
- Supermarkets/department stores
- Online only lenders
- Credit unions
- Friends and family
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.
* In comparison to some of the other options, 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 home town.
* Banks have advisors that can sit with you to discuss your business needs and the most appropriate source of funding. They also offer more options than many other types of small business finance corporation.
* 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 expected to 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 bank 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.
* Comparing alternative finance providers may enable you to 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.
* 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 of finance can vary in quality. It is very important to do your research, making sure that you can trust your chosen lender.
Types of products offered:
Sources of funds 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 finance options from a very wide range of sources 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 any business finance that is offered by traditional banks.
A) Merchant cash advance companies
Whilst other forms of small business finance require you to have existing collateral or a clear repayment deadline, merchant cash advance companies often operate a little differently.
With a merchant cash advance, you can receive the funds you need in exchange for a promise to repay using a percentage of future profits or daily income.
* If you do not qualify for a traditional bank loan, or do not have collateral to offer, then you may still be approved for a merchant cash advance.
* Your repayments will fluctuate according to your income, so that you never need to repay more than you are earning. If business goes quiet for a while, you do not need to worry about keeping up with consistent repayments.
* Interest rates are often higher than for other forms of small business finance.
* The arrangement may require all of your business income, through card payments, to go directly to your lender. 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.
B) Alternative business loan lenders
Instead of going to your bank, it is possible to apply for a loan from another small business finance company. There are many alternative providers of business loans which allow you to avoid the traditional bank branches.
* Alternative lenders may provide you with a loan at a lower interest rate than a traditional bank.
* It is usually easy to apply online, with a fast decision.
* There are many alternative lenders to choose from. Comparison sites and brokers can help you to find the best deal.
* Applying for a loan with an alternative provider is often less personal than applying for a traditional bank loan. You will not have the same chance to discuss your application.
* You will need to be particularly careful to choose a valid, trustworthy provider of small business loans. If something goes wrong, you cannot just walk into a local branch to seek a resolution.
Why choose alternative business loan lenders?
If you want a fast business loan decision, or lower interest rates, then you will often have more options with alternative lenders.
C) Peer-to-peer (P2P) lenders
Anyone with funds to spare can set themselves up as a peer-to-peer (P2P) lender. In this scenario, someone wishing to invest their money 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, whilst the lender earns interest as you pay back your debt.
Platforms that facilitate P2P lending will even split an investor’s money between various lenders, to reduce risk. The loan that you receive will likely be made up of funds from various different investors, though you will only borrow from – and pay back to – one place.
* P2P lending can help multiple small businesses to 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 in 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 that they charge. Many will undercut providers of traditional loans, whilst still being able to earn more interest than they would if their money was in a bank account.
* The P2P loan application process is not very personal. If you feel that you might need to explain your circumstances, then you may need to look elsewhere.
* Peer-to-peer loans will affect your credit rating.
Why choose a peer-to-peer loan?
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, that are acting as lenders.
When you run a small business and finance is required for growth or improvement, you may choose to source money through crowdfunding.
You will need to gain support for your business, project or idea. Others can then choose to invest money in your venture.
* When you source finance through crowdfunding, you do not usually need to pay anything back. People are donating the money to a business that they believe in, but may expect something 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 are unlikely to receive the money that you need. Crowdfunding offers a valuable opportunity to test the waters, before you turn your idea into reality.
* 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 crowdfunding?
Most sources of finance for small business will require financial repayment. Crowdfunding may provide you with the finance that you need, without any lasting debt. You can also use crowdfunding to gather public opinion, without risking your money in advance.
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.
* You are 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.
* Generally, you will be receiving personal finance instead of business finance. This works for sole traders and those that are self-employed, but not for other businesses.
Types of products offered:
Loans and credit cards.
Why choose supermarket or department store finance?
For sole traders, store credit cards come with rewards. They’re from trusted names, too. These providers have been known to offer market-leading rates, so you could potentially get a very good deal.
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.
* It’s easy to compare the offerings of 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.
* 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. Be careful not to be swept up in a scam.
Types of products offered:
Loans and credit cards.
Why choose an online only lender?
Online only lenders are often preferred for their convenience. You can apply for a loan, or other form of business finance, from your own office or even from your bed. Decisions are usually made quickly, without back-and-forth trips to the bank.
A credit union is a non-profit cooperative. They can offer small business finance with relatively low repayment rates.
Often, eligibility is based on your physical location or the type of business that you run.
* As a credit union does not make a profit, any earnings are used to improve future offerings. 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.
* Before applying for small business finance through a credit union, you will need to find one that is suitable. You’ll then need to join, and be approved, before you can request a business loan.
Why choose a credit union?
Operating on a not-for-profit basis means that credit unions do not charge high interest rates. As they’re often community-based – working for certain industries or in certain geographic locations – they’re also a more personal option.
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.
* You may be able to find a low-interest loan, or a grant that you do not need to repay.
* You will 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, particularly for a grant, may be complicated. You will need to have a clear business plan, and submit a detailed application for funding. Many businesses receive negative responses.
Types of products offered:
Small business loans and grants.
Why choose funding from the government?
Government funding can include non-repayable grants and low-interest loans, to keep you as debt-free as possible.
Brokers do not offer small business finance directly. Instead, they have access to other finance providers, to compare them and find the best deal.
* 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.
* 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?
Brokers can help you to find the best small business loan. They have access to a wide range of offerings, and are able to compare these offerings to find the one that best matches your requirements. Many brokers have stronger influence over lenders, which means that they may be in a better position to negotiate.
Friends and family
In the search for small business finance, don’t forget that friends and family members can be a valuable resource. 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.
* 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.
* 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?
Your friends and family members will want the best for you, and often they’ll do everything that they can to help you succeed. They will usually be flexible and lenient, even if they don’t have a lot of money to spare.
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.
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