To make it as a small business, you need to have incredible guts, ambition, and self-belief. Let’s face it — we can all imagine that conversation with the bank manager that goes something along the lines of “we’re planning to double our profits next year, so you’d be crazy not to invest in our dream!”
Getting initial investment in your business is only the first hurdle. Once the initial start-up phase is over and you’re looking to scale and grow, you might need further funds to allow you to do so. Typically, banks ask for 3 years of accounts, which many young businesses simply won’t have.
Fortunately, there are now other options for business finance, and the bank manager doesn’t have to be your first and last port of call. There are lenders out there that will look beyond your past track record, and look at your future trajectory.
Here are three ways you might want to use growth finance:
#1. To increase revenue
One important indicator of growth is turnover. If you have a growing turnover it could be down to a number of factors – perhaps more orders are coming in, or your market position is improving.
As a trading business, you’ll know that working capital is key when it comes to covering operating costs, and sometimes you need access to more capital than you currently have to get growth underway.
For example, if you secure a larger contract you might need to ramp up production, hire more staff, or move to bigger premises – or all three, depending on your individual business. Alternative business finance could help put any or all of these plans into action.
- Invoice finance allows you to unlock the capital in your invoices before the client has paid, meaning you can use that money to complete your next contract, rather than worrying about cashflow. There are also varieties of invoice finance like factoring that include credit control, so you get the additional benefit of not having to chase late-paying customers too.
- Purchase order finance could be a good option if you buy lots of stock and sell to the trade, and helps towards growth in a similar way to invoice finance. Or if you buy and sell internationally, trade finance allows you to get the job done without a huge – and risky – outlay, so you can go ahead and engage with those promising international clients.
- A straightforward business growth loan is a good choice if you have a specific plan to use the money for, and you can demonstrate how this plan will work – but might be trickier than the above to secure for smaller or new-start businesses.
#2. To buy equipment, or secure a loan against it
If your company has machinery and equipment at the core of the business, you’ll know that it’s not always easy to find the cash to buy them outright. Or perhaps you already own expensive equipment that was purchased in the past, but you need to free up some working capital for your growth plans – without actually getting rid of the equipment.
Asset finance like leasing, hire purchase, or sale and leaseback give you the ability to get the equipment you need to grow. You can also secure lending against valuable items you already own, and there are even types of asset finance that sit in between these two (for example, hire purchase combined with asset refinancing). Any business with equipment or machinery should consider these routes to funding – whether you rely on equipment to get work done, or you’ve got some that can be used as security for a loan.
#3. To make an acquisition
If you’re looking to acquire or merge with another business then it’s good to look at what finance could be used for this. Most commonly, you might be able to refinance your existing assets to release the cash tied up, but there are other options.
Secured commercial loans mean that you can access business loans over a long period of time based on tangible assets that you own, like properties, buy-to-let portfolios, or equity in other assets — so even if all your working capital is tied up, you can still get the finance to help you make an acquisition.
Many business owners aren’t aware that their pension could also be a valuable asset that can be used for business purposes. Pension-led funding effectively allows you to borrow money from yourself, to use for your business plans. Then, rather than paying back a lender as you would with a standard business loan, your business repays the pension pot – with interest levels defined by the Bank of England base rate.
It might sound confusing, or even scary, but it’s actually another innovative product that can help quite specific situations. For example, let’s imagine a successful businesswoman starting a new venture. If she had a large pension pot and was also a homeowner, she might prefer to borrow from her pension rather than offer a charge over the house – because in the event that the business didn’t work out, she’d still have stability at home. Pension-led funding can be complicated, and it certainly isn’t for everyone, but it’s worth knowing what it can do for you. For some companies in specific circumstances, it can be ideal.
I say this all the time, but it bears repeating – there really is a huge amount of alternative finance in the market these days. And while that means the landscape can sometimes feel overwhelmingly complicated, the upshot is that many more businesses can look beyond their bank and get the funding they need to grow.
There is still plenty of work to do for the government, finance providers, and the media, to improve SME owners’ understanding of the market and help them access finance – but whatever your situation, there’s probably a funding option available that’s perfect for you.
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