Every business needs finance at some point. But securing access to funding is a challenge for many Australian businesses.
According to the Xero State of Lending Report, 25% of small business owners are not very confident in their ability to invest in their business, with 22% believing access to capital is the greatest threat to long-term business growth.
The good news is that there are a growing number of finance solutions to help businesses access the funding they need. The type of finance that is right for you depends on the reason for seeking funding, the time scale, and the amount you need to borrow.
Generally, it’s advisable to match the type of finance to the scale of the project you are looking to fund. If you are looking to secure capital for a long-term business goal, you should choose a long-term finance solution.
To help you evaluate your options, here’s a rundown of the 7 most popular ways to finance a business.
1. Traditional Business Loans
Business loans are one of the most conventional methods for financing a business. You get a loan from a bank or lending provider and make regular payments over a set period to repay the money you borrow plus any interest and fees.
To get approved for a business loan, you will usually need to attend an in-person meeting to discuss your business plan, current financial situation, and your cash flow projections.
Traditional lenders typically require the business owner to have a strong credit rating and the business to have a substantial trading history. You’ll also need to provide a personal guarantee, and have some form of collateral – usually your house.
Because of the strict lending criteria, it can take up to three months before you receive approval for a business loan.
In our research for the ScotPac SME Growth Index, more than 20% of SMEs revealed they face cash flow problems due to being rejected for a business loan.
2. Business Credit Cards
A credit card is a simple way to access credit and fund business purchases. There are many different cards on the market, with some offering rewards and benefits, including interest-free periods of up to 30 days.
However, this type of business finance does come with significant risks. If you miss a payment, your credit score will take a considerable hit. You can also find yourself in a financial hole if you only pay the minimum each month.
Business credit cards can be a good option if you need a flexible line of credit to cover occasional short-term cash flow gaps, and you pay off the balance quickly. If you need a more long-term source of finance with less risk, there are better solutions available.
3. Invoice Finance
Invoice finance is a way for businesses to release the cash tied up in unpaid sales invoices. It’s one of the most used ways to access business finance in the US and the UK.
Because you are releasing money owed to your business, there are no repayments or interest charges. You can access up to 95% of the invoice value immediately after making the sale, and receive the remaining balance less the factoring fee when the debtor pays the invoice. Unlike a traditional business loan, you can access funding without using your home or property as security.
If you choose to use Invoice Finance, it’s important to choose an arrangement that suits your business requirements. Many businesses prefer an end-to-end accounts receivable solution where your business collections are outsourced to the finance company. While this enables you to focus on growing your business rather than chasing payments, your customers may be aware of your relationship with the financing company, depending on your arrangement.
If you prefer to keep the relationship confidential or access a more flexible line of credit, you can arrange a confidential agreement with the invoice factoring company.
Invoice Finance is suited to B2B companies and businesses that offer extended payment terms to their customers. If you sell directly to consumers through a retail store, there are alternative finance solutions that are more suited to your needs.
4. Angel Investors
Angel investors are people looking to invest their money into businesses in return for shares or percentage ownership of the company and profits. Generally, they look for growing businesses where they can make a profit by selling their stake in the medium-term, once the business has become more established and generates more revenue.
If you seek finance from an angel investor, you will need to be comfortable selling a stake in your business and dealing with the scrutiny and input of the investor. In exchange, an angel investor can provide experience and advice to help the company grow, in addition to the funding they provide.
Finding an angel investor is not a short-term finance solution. You will need to be prepared to search for several months to find an investor. You’ll also need professional advice to help you draft a formal agreement and make sure you are aware of the implications. It usually means you will lose some control over your business.
If financing a business through an angel investor is a route you want to explore, be prepared to pitch your business as an investment opportunity and have the documents to back up any claims you make.
You’ll need to demonstrate demand for your products and services, compile competitive analysis reports, and have a robust marketing and sales strategy.
The investor will be interested in your business but also in you and your experience and ability to take the company forward.
Asset Finance is a solution that is often used to fund the purchase of machinery, equipment, or other expensive business costs.
This type of finance can be beneficial to businesses that have an opportunity to expand and grow but lack access to the funds needed to capitalize. It’s also a good choice for companies with significant assets but a shortage in working capital, such as plant hire and manufacturing companies.
Businesses can use the assets they already own to secure a line of credit from the finance provider. The finance company will fund up to 100% of the cost of the new or used asset, and the lender will repay the sum owed over a set period. This type of finance also enables you to access capital in your existing business assets.
Depending on the terms of the finance, the asset will become the property of the borrower once the principal and interest have been repaid. Businesses can use inventory, property, equipment, or accounts receivable as collateral to secure asset finance.
Before you use any existing assets as collateral, it’s important to establish how you will be able to make the repayments.
The Australian government offers a range of grants for businesses across several industries. These grants are fully-funded, intending to support enterprises as they grow. If you qualify, government grants can be a low-risk finance option.
Grants are usually awarded as a one-off payment, such as a research and development grant to be spent on a particular project.
Financing a business project through a government grant will usually require time and effort on your part to research and create a proposal. While there are several grants you may qualify for, the application process is complex and can last for several months.
There are also strict conditions you must meet to be eligible, and there may be restrictions on what you can spend the money on.
To find out if your business is eligible for a government grant, use the free tool on the business.gov.au website.
7. Trade Finance
Trade finance helps businesses to maintain working capital and fund the purchase of stock, raw materials, and inventory. It’s a business finance solution most commonly used by manufacturers, wholesalers, and importers.
The lender provides a revolving line of credit so the businesses can accept new orders, pay suppliers, and continue to grow rather than waiting to receive payment from their customers. Trade finance can also be used to increase your buying power and negotiate bulk discounts from your overseas and local suppliers.
ScotPac Trade Finance is a flexible finance solution that uses telegraphic transfers, Letters of Credit, and Documents against Payment to pay global suppliers in almost any currency. You can take on new customers and grow your business without worrying about how your cash flow will be impacted while waiting for payment.
Financing a Business with ScotPac
With over 30 years of experience lending to Australia’s SMEs, we’re experts at helping businesses access the funding they need. We offer a range of finance solutions to help you manage your cash flow and invest in your business, even if you have been knocked back by the banks.
If you’re not sure which type of business finance is right for you, get in touch, and we’ll help you find the best solution for your needs.