It goes without saying that banks have their uses – without them, very few businesses would ever get off the ground. It’s also important to say that they have their limitations, especially when it comes to making business finance work for you.
Of course, banks offer products that are suitable in many circumstances. Agreed overdrafts, for instance, provide unparalleled flexibility when it comes to making unexpected purchases, smoothing over cash flow blips or simply coping with a late paying client, and if the business has a good track record can be arranged at an advantageous rate of interest.
Similarly, bank loans can provide structured business finance, with an agreed repayment plan, for longer-term commitments. This is a particularly appropriate form of finance where time is not of the essence, as it can take weeks or even months to complete the paperwork, undergo credit checks, receive an in-principle decision and finally get your hands on the funds.
When it's time to think beyond banks
However, banks aren’t appropriate for every business or every situation, so here are a few alternative ideas. Equity financing involves selling shares to interested investors and can raise substantial sums without the need to make repayments or incur interest charges. The downside is that it dilutes your ownership of the company and proportionally reduces the profits you will receive if the business really takes off.
Another option for attracting business finance in return for equity involves business angels. We’ve all seen Dragons’ Den, and whilst some of the pitches may be excruciating, the principle is sound: business angels can bring not only ready cash but the kind of specialist expertise and commercial acumen that can propel a business from the middle of the road into the fast lane.
Thinking outside the box
The lesser-known option of mezzanine financing provides unsecured lending but with very high interest rates, which can reach up to 30%. There’s also a significant sting in the tail: the lender can convert the debt into equity if you default on your repayments, though you will never find yourself in the situation of facing a debt you cannot repay.
Alternatively, you could make use of the government’s Enterprise Finance Guarantee Scheme. Set up to assist SMEs with their working capital requirements, the scheme underwrites up to 75% of a loan; some banks are not keen on the scheme, but others are far more receptive. What’s more, capital and interest holidays can usually be agreed, making this an excellent option for a beleaguered company seeking to stabilise and return to profitability.
Rapid cash or lower interest rates?
However, there may be times when you’re facing a financial chasm and need money fast – and chances are your bank isn’t going to be much help. In contrast, specialist providers of emergency finance can provide business loans within 24 hours, generally at quite competitive interest rates. Alternatively, to meet longer-term financial commitments, asset-based finance can be secured on your existing plant and commitment, thus generally providing lower rates of interest.
Invoice factoring and discounting – your invoices paid, instantly.
Invoice finance in the form of factoring and discounting are also excellent ways of dealing with cash flow peaks and troughs, particularly if you have clients who pay slowly or unpredictably. In essence, you borrow against the value of your outstanding invoices – as soon as you issue them. If you opt for invoice discounting, it’s then up to you to secure payment from your client to repay the loan and interest.
Alternatively, if you choose factoring, the factoring company will take control of your ledger and oversee all aspects of your debt management. The advantage is that their people are specialists in dealing with outstanding and overdue invoices and aim to secure payment as fast as possible to keep your interest charges to a minimum. However, many companies prefer not to have a third party interacting with their clients and so opt for invoice discounting instead. Typically, invoice discounting and factoring arrangements can be set up in around three to four weeks.
For further information Download our Guidance Paper on 'How short term business loans can help your business finance problems', or view the following relevant pages:
- Business loans
- A guide to Short term business loans
- Emergency business loans
- Emergency business loan - why not use a bank
- A guide to Small Business Loans
- How quick business loans can encourage business turnaround
- How to get a quick business loan
- The pros and cons of secured business loans
- How to make business finance work for you
- A case study: How we helped a recruitment firm invest for growth
- A case study: Quick business loans could be the answer
- Business loan calculator