Companies of all sizes often need a little bit of financial help to fuel their growth and development. Even if profits are, on paper, looking pretty healthy, that doesn’t necessarily mean that the business will be financially secure. There’s a whole bunch of reasons why a company’s cash flow may not be as healthy as it could be, including having clients who are slow to pay their invoices and unexpected costs.
The good news for companies is that they don’t need to stay in a precarious financial situation. There are business finance options available, the two main ones being debt finance and equity finance.
In this blog, we’ll run through the pros and cons of each.
Debt Finance
Debt Finance is just what it sounds like: the company takes on debt that is repaid with interest over a predetermined period of time. There are multiple different debt finance options available, as we’ll see below.
But before they do that, let’s think about the pros and cons of this type of funding. The key advantage is that it allows you to stay in full control of your business; you can get the cash without having to give away a stake in your company, which would give investors a say — not to mention a slice of the profits. Some of the interest may be tax-deductible, too, which further helps with your company’s bottom line.
The disadvantage of debt finance is that you’ll have to pay back the money plus interest. That will be manageable when everything is running smoothly but may be stress-inducing if you hit hard times.
Now let’s take a look at the different types of debt finance available.
Bank Loans
Bank loans come in the form of a lump sum of cash from, of course, a bank. Many businesses use bank loans to fund their growth or to pay for a large purchase. The business then repays the value of the lump sum plus interest of a set period. While bank loans are a good option, they can be difficult to get, and the process can be time-consuming, especially if the business is undertaking the task themselves. The bank will want to see a detailed business plan before agreeing to give the money.
Credit Cards
A business credit card is a good alternative to a bank loan because they’re easier to get. This type of credit card is generally used to fund everyday purchases rather than big purchases. They’re also generally not used for all-important expenses, such as rent or overheads.
Most businesses will be eligible for a business credit card. As with personal credit cards, it’s important to clear the balance each month. If you don’t, then interest and other charges can quickly add up and affect the company’s bottom line.
Invoice Financing
Some clients just won’t pay on time, and that can impact the company’s cash flow, sometimes to an extreme degree. In that situation, invoice financing can help. This allows businesses to get a cash advance on unpaid invoices. While the amount that the business will receive can rarely, it’s usually in the region of 95%. When the client pays, you’ll receive the rest, minus the fee that the invoice finance company charges.
Line of Credit
A line of credit is similar in function and scope to a credit card. You can think of it in a similar way to an overdraft. You can use it for everyday purchases; when you do, the available balance will reduce. When you pay off some of the balance, the available balance will increase.
Equity Finance
With equity finance, there is no debt and nothing to repay. In exchange for money, you’ll give a stake in your company. This will impact the amount of control you have within the business, as well as the profits, which will need to be shared. How much depends on how much you’re asking for.
The primary advantage of equity finance is that there’s no debt to repay, and that can be extremely useful — not to mention less stressful. But before agreeing to accept this type of financing, you’ll need to think about what you’ll be giving up in exchange.
Crowdfunding
Crowdfunding has become increasingly popular in recent years. It’s especially prominent in the startup sector and among companies that have an innovative idea. You don’t necessarily need to have a history of success in order to launch a crowdfunding campaign, but you will need to invest heavily in marketing. It can be a long process, but if it’s successful, then you may have long-term funding for your business.
Venture Capital
If a company has high growth potential, then it may look at venture capital funding. In order to get this type of funding, the business must be scalable and must already have some degree of success. The process for accessing this type of financing can be extensive. For instance, a potential investor will want to audit your business before agreeing to invest, so having up to date accounts and other vital pieces of information is essential.
Most companies won’t qualify for this type of funding. Venture capitalists look to invest large sums of money into companies that are likely to one day bring a large return.
Angel Investors
Angel investors are similar to venture capitalists. You’ll be giving up shares or a percentage of ownership in your company in exchange for funding. Angel investors are usually individual people who use their own money to invest in companies. As well as money, they also usually offer advice, guidance, and connections that can help with the development of the company.
As with venture capital funding, finding an angel investor can be difficult. To increase your chances, you’ll need to attend events and explore all of your connections.
Final Thoughts
As we’ve seen, there’s no shortage of financing options available to you. Choosing the right one will depend on various details, including how much you need, how quickly you need it, and what you can offer in exchange (interest repayments or equity).