What’s The Right Type of Finance for Your Business?

Every business needs enough capital to operate effectively, but not all forms of financing are equal. Each have their pros and cons, and it is important to understand the options which are most suitable for you. The main types of financing can be split into the categories of debt and equity.

Debt Financing

Simply put, debt financing is the process of renting money. Fees, service charges and interest are the rent, and the money you borrow eventually has to be repaid. While debt financing can allow you to use other people’s capital in the short term to achieve your aims, it should not be viewed as a sustainable way in which to support your business model over the long run.

The simplest and least risky version of debt financing is the humble bank overdraft. Most businesses should be able to secure a fairly significant overdraft, and it is worth shopping around to find the best deal on service charges and interest free periods. Be careful not to go for the lowest interest deal without checking the small print.

Banks will also often extend lines of credit to small businesses, but this may require collateral to secure the debt and should be considered carefully. If you are a start-up venture, make sure that you are confident about your cash flow projections before committing to interest payments.

Equity

Equity is capital provided by the owners of the business. Owners are rewarded for the investment through dividends, which are paid out of the profits of the venture, as well as any increase in the value of the business when it is sold.

The most obvious source of equity finance is, of course, yourself. If you have savings or other assets, you will need to leverage at least some of them into your new venture. If nothing else, most providers of both debt and equity finance will want to see proof that you also have a stake in the business. You can also seek both loans (debt finance) and share purchases (equity finance) from friends and family, but be careful about this. It is not worth ruining strong personal relationships for a few extra pounds.

If you are in need of more money than you or your immediate circle of acquaintances can provide, it may be worth looking for venture capital, either from a specialist firm or an ‘angel’ investor. This can be extremely helpful, not just for the sums of money received, but also for the business expertise that also comes with (think Dragon’s Den!). However, such assistance doesn’t come for free, and you should be expecting to give up a significant chunk of your business in return.

Lastly, don’t forget ‘internal finance’, which is the best kind of all. Simply put, this is the revenue generated by your business itself. Always keep your main focus on increasing your business income, which will enable you to be less reliant on external finance in the future.

We can offer you financial solutions to help keep your cashflow healthy. Request a quote now to find out how much invoice finance can save you.


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