What types of finance can I get for a small business?
Published by MFAA
A lot of small businesses fail not because they're offering a poor product but because they run out of cash.
You'll need access to funds, not just to pay for set-up costs but to cover your living expenses while you get established. Make sure you've done a detailed business plan and cash flow projection so you know how much funding it's likely you'll need.
Securing financing is a hurdle many small business owners will encounter, but there are more options than you may think.
Your small business finance or commercial finance options include:
- business loans
- commercial loans
- lines of credit
- cash flow financing
- home equity loans
- franchise funding
- venture capital
Business finance vs commercial finance
Both business finance and commercial finance are generally secured by either commercial or residential property and similar lending requirements apply to both.
However, business finance is probably more associated with small business enterprises (SMEs). Commercial finance tends to relate more to the financing of commercial property.
- Business loans
Business loans are where the finance is for business purposes and the interest cost associated with the loan is tax deductible against the profits of the business. Small business operators provide security by way of residential or commercial property.
- Commercial loans
A commercial loan is where the finance is for the purchasing of a commercial property, commercial property development or business purchase.
Commercial loans are secured either by commercial or residential property. With larger corporate borrowers, lenders can rely purely on the assets of the company as loan security, for example trade debtors.
Lines of credit
With a line of credit, you're given a borrowing limit by the lender and you draw down money – up to that limit – as you need it. The advantage of a line of credit is that you only pay interest as you draw down money. The disadvantage is that the rate of interest may be higher.
A line of credit should be 'fully fluctuating' and should only be used as a short-term financing option rather than for the purchase of major commercial plant or equipment.
Cash flow financing
Cash flow financing is a form of financing in which a company's expected cash flow is used as security against the loan.
Cash flow financing can take different forms for example invoice financing (also referred to as invoice factoring or debtor financing) where the customer receives a loan secured by the future payment of their invoices.
Home equity loan
Many people have limited cash reserves but have built up equity in their homes. That is, their homes are worth more than they still owe on their mortgages. You can tap into this equity to help finance your business or investment by taking out a home equity loan.
Franchise finance or franchise funding
To meet an emerging need, new business finance products have come onto the market to help people buy franchises. Lenders can be more inclined to provide franchise finance because, while your business might be new, it could be based on a proven formula.
Venture capital (VC) describes where a lender gives you funds in return for a stake in your business. The further your idea is from fruition, the less likely the venture capital or VC firm will be to give you the money, and the more equity they'll want in return.
To talk about financing options for your small business, contact an MFAA Accredited Finance Broker today.