Alternative Ways to Finance Your Small Business

AD – This is a guest post written in collaboration between me and Choice Business Loans

It can feel almost impossible to maintain and grow a small business these days. From the saturated markets to complicated insurance policies, to trying to grow awareness for your company. Everything can seem a little overwhelming. And that’s without even considering your finances, which can often be the hardest part. Funding your venture – from the very start until the moment you take over the world – isn’t easy and sometimes you might need a helpful little push to get going.

Going down the route of a traditional bank loan might seem like the easiest route. But it doesn’t work for everyone. Sometimes it’s easier to venture down the path less traveled and seek alternative sources for your funding. You’ll find the right option to get you going, it’s just a matter of doing your research. To get you started, here are a few of the most popular alternative ways to fund your business.

Merchant Cash Advance (MCA)

A Merchant Cash Advance can be the perfect solution to cash flow issues for businesses who make a lot of their money from card payments via a terminal rather than through invoicing and bank transfers. Based on a company’s credit or debit card transactions, repayment involves the loan provider working alongside the terminal provider, with a small amount (typically 10 to 15%)  of each card transaction being paid right back to the loan provider until the entire amount you borrowed has been repaid. Normally you can borrow roughly the equivalent of your average turnover per month. If your business is decently healthy there shouldn’t be many issues in obtaining an MCA.

Let’s get into the details. Merchant Cash Advances have high approval rates and no fixed term. There are no hidden charges, and no need to provide security or business plans. With zero APR (meaning you’ll pay no interest). And the knowledge that some money is paid back every time someone taps their card on your terminal, there’s no need to worry about squirrelling money away each month to pay on a set date.

Invoice Finance

Invoice Finance is one of the slightly more complicated ways to help ease your cash flow. But lets break it down for you a little bit. Basically, invoice financing is where a third party agrees to buy a businesses’ unpaid invoices for a fee. The buyer can be from a specialist company, part of a bank, or a group of one or more individuals.  This route is perfect for small businesses who need steady cash flow and cannot rely on all their invoices being paid on time.

There are a few different ways to go about this. First off, there’s invoice discounting. This would mean the invoice buyer wouldn’t collect unpaid debts on your behalf or manage your sales ledger. But instead lend your business money against your unpaid invoices for a pre-arranged fee. This means that you can remain the point of contact for your customers and it leaves you in charge of collecting debts. This means that you borrowing money can stay confidential. This helps to establish a confident and strong relationship between you and your customers.

Alternatively, there’s invoice factoring. Using this method, the person or business financing your invoices will “buy” the debt owed to your business by the customer. They make their money by taking a percentage (usually around 15%) of this debt as interest. The remainder (around 85%) will be made available to you upfront. This means that whilst the financier gets a cut of your sales, you’re still left with a reliable cash flow

Similar to invoice factoring, there’s also invoice trading. This uses online platforms to allow businesses to obtain money from individual investors, bypassing the traditional financiers.  This is pretty close to how peer-to-peer lending works, which you can read more about below.

Peer-to-peer Lending

Peer-to-peer lending cuts out the middle man completely, allowing individual investors to lend their personal money to a business for a pre-agreed interest rate. These are pretty simple to get your head around, and can work in the same sort of way as crowdfunding. However, it’s important to remember that peer-to-peer lending requires more time, effort and risk than a traditional bank loan. Whilst not being secured by a government guarantee may mean you don’t get so stressed about missing a payment. It does mean you have to be extra careful when brokering these deals that both parties are protected and that the deal itself is reasonable.

Crowdfunding

Crowdfunding is an ever-increasingly popular way to gain funds for any kind of business venture. Using sites like Kickstarter, Patreon, or GoFundMe, business (or individuals for that matter) can set a target for the amount of money they wish to raise, and offer incentives for donating. They can either offer rewards – personalised thank-yous, tshirts, and free services to name a few. Or offer incentives based on equity, like shares in their business.

Unsecured Business Loans

As opposed to secured loans, which use assets like real estate or business equipment as security against the loan. Unsecured loans rely on the creditworthiness of the borrower. Due to this lack of security, lenders often ask for a personal guarantee, often from the managing director of the company. Whilst unsecured loans often cost a little more due to the increased cost from the lender, they’re great for businesses who’s assets aren’t tangible. For instance those working in rented offices on personal computers. They’re also great for small businesses that are growing fast, and need finance quickly to continue growing.

If you’re curious about alternative forms of finance, Choice Business Loans offer all these and more. And they’re very happy to help and answer any of your questions, so check them out.