At various stages in your business journey, it’s likely that you will want to grow faster than your bank account balance will allow.
Passing up business opportunities not only costs you revenue, but may also cost you market share as competitors take advantage of market conditions and opportunities that you were unable to capitalize on.
Traditionally there have been two ways to fund your business growth; debt or equity. However, there is now a third. An evolution on debt financing, invoice factoring allows you to turn your accounts receivable into assets.
We’ll explore the traditional financing forms before moving onto the latest innovation in business financing.
Equity financing made fashionable by shows like Shark Tank and Dragon’s Den, involves giving up a percent of shares in your business in exchange for business funding.
The benefit to this funding is that you have no obligation to repay the financing. There are however two considerations to this form of funding.
If the investor also comes with valuable connections, a route to market, or other assets it is often a very popular funding option.
Many entrepreneurs will fund their own growth either using personal cash reserves, selling assets or raising funds in the form of personal debt such as second mortgages or credit cards.
Thanks to emergence and dominance of fintech over the last few years you can now raise money from lots of individuals in exchange for an equity share of your business.
Similar to crowd financing, cloud financing involves raising financing from individuals forming one collective (similar to a special purpose vehicle). However, this takes place on the internet.
Taking on a business partner with funds is another way to finance your business growth, however it’s important that you both have the same vision for the growth and direction of the company.
Venture capitalists usually invest in high growth potential startups, they will often invest heavily and in exchange will want a controlling share in the business. They will often want to exit in a relatively short time.
Angel investors are wealthy individuals and/or high earners that want to invest for a number of reasons, namely;
There are of course others but that summarizes the main equity financing options available to a business owner. The next section will discuss debt financing.
Unlike equity financing, debt funding is carried out entirely on the basis of being repaid in full plus interest.
Usually you will have to pay the interest plus make capital repayments at least on a monthly basis, and you may have to provide some assurance or security for the lender. These forms of security might include; Personal guarantee, secured against an asset, third party guarantee or directors guarantee.
Banks, especially the bank you carry out your day-to-day business banking with may provide you with some debt facilities. These will often be either via credit cards, overdrafts or small business loans.
When you are applying for a small business loan, be sure to google ‘small business loans’, you will see a plethora of options available. These may have better terms, require less security or in fact, there may be no difference at all, however shopping around is a necessity.
The final form of financing that we discussed previously is ‘Invoice Factoring’.
An evolution of debt financing, invoice factoring is when an organization or individual lends you money against your invoices due. If you can demonstrate that you have a number of invoices or payables due, they will lend you a portion of that amount. The proviso is that when you receive those billables, you repay the debt and any fees.
Invoice factoring offers a number of advantages as compared with other options:
This can be a quick and simple solution to vastly improving a cash flow situation, allowing you to take advantage of market opportunities ahead of your competitors.
Scale Funding is an invoice factoring company serving businesses across the United States. For more information on factoring, call (800) 707-4845 for a free, no-obligation consultation and quote.