Article updated 30/10/2024
Business cash flow and profit are not the same. Many successful companies and small business owners need funding to support working capital and fuel growth plans.
56% of businesses across the US, Canada, the UK, Australia and New Zealand experience cash-flow related pressure. That’s why maintaining sufficient cash flow and access to working capital is essential for ensuring sustainable business success.
Here’s a rundown of funding and finance options you can explore when looking for additional working capital.
Debt Finance or Equity Finance
There are two main types of business finance funding: Debt Finance and Equity Finance.
Debt Finance
With debt finance, a business receives funding from a third-party source and repays the money borrowed, plus interest and fees.
Equity Finance
With equity finance, a third party provides funding in exchange for part ownership or shares in the business.
Types of Finance: Debt Finance
Debt financing is the most common type of business finance and encompasses traditional and alternative funding sources. You don’t need to offer any equity in exchange for funding with debt finance, but you will typically need to repay the sum borrowed, plus interest.
Invoice Finance
Invoice Finance is a flexible funding solution that allows a business to turn its outstanding sales invoices into readily available funding. Instead of waiting 30+ days for your customers to pay, you can use this solution to receive up to 985% of the invoice value as a cash advance.
Unlike a bank loan, you don’t need to use your home as collateral.
This type of funding is available to businesses that sell to other businesses and raise sales invoices for their goods and services.
Trade Finance
Trade Finance is a business finance solution that helps importers and exporters cover cash flow gaps and mitigate the risks involved with international trade. It can also be used for domestic trade, along with other solutions like supply chain finance.
By using a third party to finance a transaction, the supplier can be sure they will be paid once the goods are shipped, and the buyer has protections to ensure they will receive the goods.
Buyers can use trade finance to cover cash gaps caused by having to wait for shipments and use the funding to negotiate early payment and bulk buying discounts. Suppliers can release the money tied up in goods sold and speed up cash cycles.
For a more detailed look at this type of funding, read our blog post How Trade Finance Works.
Asset Finance
Asset Finance is a type of finance that helps a business fund the purchase of high-value assets, including new and second-hand machinery, equipment, and vehicles.
This form of financing typically involves hire purchasing, finance leasing, and operating leasing. Unlike a traditional loan, the asset the business wants to purchase acts as collateral for funding, so there is no need for property security. The business makes regular repayments over a set period to pay back the principal and interest.
Business Loans
Business loans from non-bank lenders, such as ScotPac, offer a flexible financing alternative for businesses of all sizes. These loans typically range from $10,000 to $500,000 and are designed to cater to various business needs with a more streamlined application process, online platform, and faster funding approval.
Non-bank lenders also tend to have fewer documentation requirements and quicker approval times compared to traditional banks, which reduces both the administrative burden and the difficulty of meeting loan-related eligibility criteria.
Bank Loans
A bank loan can provide a large lump sum to fund the expansion of a business with a strong credit rating. The principal, plus interest, is repaid over a set period through regular repayments.
Bank loans are a very rigid type of business finance that is often out of reach for small businesses. The application process can last several months, and strict lending criteria mean you will need to submit a detailed business plan, provide collateral, and have a strong financial track record.
Business Credit Cards
Business credit cards can support working capital and cover small everyday business expenses. More accessible than a bank loan, credit card interest rates and fees can be expensive and quickly add up if you don’t clear your balance each month.
Line of Credit
A line of credit allows a business to pay for everyday expenses, cover emergency costs, and fund expansion. It works similarly to a business credit card or overdraft.
You can draw down on the available credit whenever you need. As you take out funds and make repayments, the available credit limit increases and decreases accordingly.
This type of business finance is often used alongside an Invoice Finance facility. You draw funds as and when you need them and make repayments when you raise and submit a new invoice to the lending company.
Merchant Cash Advance
A merchant cash advance is a financing solution for businesses that process significant volumes of customer card payments. The amount you can borrow is determined by the value of the card payments processed at your business.
Once funding is in place, every time you process a card payment, a percentage of the payment value is automatically used to repay the principal and interest on the sum owed. The amount you repay in a month depends on the value of the card payments you process.
This type of funding can help businesses with seasonal sales cycles, but there are many pros and cons to a merchant cash advance and interest rates are usually higher than other types of financing.
Types of Finance: Equity Finance
Equity financing covers a smaller range of funding solutions. With equity finance, you will need to give up a stake in your business in exchange for funding. There are no repayments or interest, but you will need to share some control and profits with your investors.
Crowdfunding
Crowdfunding has become a popular way for start-ups and innovative companies to seek funding. As a business owner, you don’t need to have a strong credit rating or collateral to secure financing, but you will need to create a strong promotional campaign to attract potential investors.
Crowdfunding is a long-term funding solution. You’ll need to have a compelling pitch and be willing to dedicate significant time and effort to promote your business.
Venture Capital
Venture capital is a possible funding source for businesses with high growth potential looking to raise finance. You’ll need a scalable business plan and have achieved some success already to appeal to investors. Before venture capitalists (or other financial institutions) are willing to invest, they’ll want to audit your business, so you’ll need to keep your accounts and business plan up to date.
This type of equity financing is out of reach for small businesses, with venture capitalists looking to invest significant sums of money in companies with a high chance of producing a large return.
Angel Investors
This type of equity finance has some similarities to venture capital. Essentially, you offer shares or part-ownership in your business in exchange for funding. You’ll need a detailed business plan, up to date accounts, and growth potential to attract potential investors.
Angel investors typically work alone and use their own money to fund investments. Alongside funding, an angel investor can offer experience, connections, and advice to help you grow your business.
Finding an angel investor can be challenging. You’ll need to attend events, explore mutual connections, and expand your network to increase the chances of finding an investor.
Family and Friends
Mixing business with personal life can create problems, but friends and family may be able to offer financial support to help you grow your business. Many of the most successful companies, including Amazon, were started with a loan from a family member.
If you do seek funding from friends and family, be clear about the terms of the financing. Put together a basic contract outlining the share of equity or repayment terms.
Determining the Types of Finance You Need to Improve Business Cash Flow
When you’re determining which of type of business finance is right for your business, ask yourself the following questions:
- How much capital do I need?
- How quickly do I need funding?
- What types of funding will I qualify for?
- How much can I afford to repay per month?
If you require business financing to cover cash flow gaps as your business grows, a flexible Invoice Finance facility could be a good solution. Alternatively, you may consider a Business Loan or Asset Finance to source the capital you need. the capital you need.
Are you seeking Business Funding?
Most finance companies offer at least some of the previously mentioned types of business finance. If you need assistance identifying the right business finance option for your circumstances, ScotPac is here to provide expert advice.
Speak to one of our lending specialists today to explore different business finance options and find the one best suited for your business.