Small businesses and start-ups have various reasons for needing to obtain finance and the amounts can be small or large. The good news is that there are a number of available alternatives however it is important to be clear about what you need the money for before making any decisions. Is the money for equipment, refurbishments, a new vehicle or machine? How much will this cost and will it improve your business and its cash flow and profitability?
If you’re running a small business as a sole trader or partnership then external investment is likely out of the question unless it comes from family members. If approaching family for investment is a possibility it can be low cost, however it should be done professionally to avoid damaging relationships.
The most likely type of finance for your business is therefore borrowing which can be in various forms. We have detailed some options below and their main advantages and disadvantages:
- Overdraft – this is normally for covering short term financing needs and shouldn’t be considered as a long term finance option. It can be quick to arrange and flexible however it can be costly if you go over your limit or need to extend it and your bank can request repayment at any time.
- Loan – business loans can vary in length in line with your business needs. They are ideal for purchasing assets or for one off expenses but shouldn’t be used for ongoing expenses. Loans are generally not repayable on demand and can last for the lifetime of the asset being purchased however loans aren’t flexible, can cause difficulty in planning your finances if interest is variable and they may require some form of security, possibly on your personal assets such as your home.
- Leasing / HP finance – this option is widely available and tends to be most suited for the purchase of vehicles, equipment or machinery. Interest on this type of finance is usually fixed and the lease is secured on the asset itself rather than any personal assets. A lease will however cost more than buying an asset outright and you may be required to pay a deposit.
Another possibility is grant funding. For more information on grant funding opportunities visit the government’s website here https://www.gov.uk/business-finance-support-finder. Grants may also be available from local councils and charities.
If your business has surplus cash, don’t automatically assume that using this cash for a new vehicle, machine, etc. is the best option. It’s important to ensure that you maintain sufficient cash reserves to meet the regular needs of your business as the cash benefits of your investment may be much more long term.
Please note that this post is not meant to advise on the type of finance option any particular business should take but serves to highlight some of the options available.