Business loans, invoice finance, asset finance, vehicle finance… the list for business finance goes on and on. It can often seem like a minefield trying to navigate your way through the various financial options available on the market. So, how do you know what funding stream is right for your business?
We’ll explore each one in more detail, to arm you with the knowledge you need to make the right decision to achieve future growth and sustainability.
The traditional one of the pack – it’s as simple as it sounds. Business loans are a method of borrowing, specifically for commercial entities. Loans range from £5,000 to £2 million, with repayment terms varying from 3 months to 5 years.
Business loans – which can be used for any purpose relating to your business, including expanding operations, buying stock and taking on new employees – are split into two categories: secured and unsecured.
- Secured: this type of loan requires you to pledge an asset (e.g. a property) as collateral for the loan, which then becomes a secured debt owed to the creditor.
- Unsecured: a loan that allows you to borrow money without having to offer up any assets as collateral.
The decision to offer a business any type of loan is based on the business’ ability to pay back the money borrowed. As such, the funder will carry out in-depth credit and business checks to assess your ability to repay.
Invoice Finance is an excellent way of improving cash flow, to ensure you pay employees and suppliers on time. Typically, this type of business finance is taken by business owners who face extended payment terms from their customers and need access to additional working capital. By unlocking up to 90% of unpaid invoices, businesses can receive the cash injection they need, rather than waiting for customers to settle their debts in full.
There are two types of Invoice Finance – Factoring and Invoice Discounting:
- Factoring: this is a way of unlocking cash flow by raising up to 90% of the gross value of unpaid invoices. In addition to generating additional working capital, using a factoring service can reduce business expenditure by outsourcing credit control. Here, the invoice finance company will support your business with credit control services, contacting debtors on your behalf and collecting payments.
- Invoice Discounting: this facility provides a similar level of funding but allows you to maintain the customer relationship and credit control, rather than outsourcing that responsibility to the invoice finance provider.
Asset finance provides you with access to the equipment your business needs by allowing you to borrow a sum of money to cover the cost. The funder purchases the equipment on the company’s behalf, then in return they lease the equipment to the customer for fixed, monthly rental payments. This type of finance allows you to invest in vital areas of your business for a manageable annual sum and is often a more tax efficient, flexible and affordable solution than purchasing.
There are two types of asset finance – soft asset and hard asset.
- Soft assets – These include office equipment, software, catering equipment and typically have a low resale value.
- Hard assets – These include vehicles, machinery, manufacturing equipment. All of which can be new and used, and tend to have a higher resale value than soft assets.
Vehicle finance is an excellent alternative to buying a vehicle outright. Because there is no need to pay one lump sum, it allows you to hold on to your financial savings and help you purchase or lease a vehicle in a manageable way. You will have an agreement for how much you pay every month, meaning you can budget for future expenses much easier. Another benefit for this source of finance is that you can often afford a higher quality and more expensive car because you can split your payments over an extended period of time.
If you’d like to find out more about what funding stream is right for your business, contact us today http://www.1pm.co.uk/home/1pm-contact/.