Posted on 21 March, 2018 | 3 min
If you’re running a business, you may have growth on your list of things to do in 2018. When looking to grow your business, funding is one of the most important factors on your road to success, and most business owners would traditionally apply for a business loan with their bank. But since the financial crisis of 2008, traditional lending to small and medium-sized businesses has reduced.
Luckily, the number of alternative business finance providers has increased over the last few years. They offer several new funding options, which are often much faster than the bank. Whether you want to scale your business, need a bridging loan, or simply want to see what’s out there, here are a few finance options that could be your springboard to increased business growth in 2018.
No matter what lender you go to, they’ll need to assess your business’s creditworthiness. So, you should prepare for a few common questions, one of which is ‘how long has the business been trading?. Usually, lenders would want to see a trading history of at least 1-2 years, but some providers also offer loans to startups or fairly new businesses — albeit with a lower maximum credit limit.
To assess how much your business is eligible for, the lender will also want to see your bank statements, annual turnover, and profit margin, as well as your credit rating. In some cases, the underwriter will want to talk to you about your business to factor in some more information, and you’ll have a chance to explain certain aspects of your business’s history. This is one of the qualities where alternative lenders differ from traditional banks. Let’s have a look at some of the different funding options available.
Unsecured business loan
Younger businesses usually don’t have any assets they could use to secure finance — this is where an unsecured business loan might come in handy. Unsecured loans don’t require any collateral, because they are normally backed up by a business’s trading position. That means the lender will make a fair estimate on your business’s future based on how it has done in the recent past.
Lenders will often specify the loan amount as a multiple of your turnover, and you may be able to borrow 10-30% of your annual turnover unsecured. However, because there are no assets involved, your business will need to be profitable for the lender to be interested.
Bear in mind, without any security the lender carries a higher risk, which eventually leads to a higher interest rate. Unsecured business loans also tend to have lower credit limits, and take place over a shorter period of time.
Revolving credit facility
A good alternative to your classic overdraft may be a revolving credit facility, which is a ‘rolling’ agreement with a lender rather than a fixed business loan. It’s a type of unsecured finance, which allows you to draw down funds from a pre-approved credit limit, and aside from any setup fees, interest is only charged on the outstanding amount.
The terms vary, but usually your credit limit will also include a limit on how long after drawing funds you need to make repayments. Some revolving credit facilities even come with a card attached to them, so they can end up being very similar to business credit cards in practice.
Merchant cash advance
Merchant cash advances are a quick and easy funding solution for many SMEs, particularly those without assets who aren’t eligible for an unsecured loan. If your business uses card machines, a merchant cash advance means you can use them as the basis for lending. This is ideal for businesses without many assets, but who have a good volume of card transactions every month, such as retail businesses or the leisure sector. Repayments are taken as a proportion of your revenue — depending on your advance rate it could be 10-20% of your monthly sales — which means the amount you repay goes up and down with your overall takings.
Most of the common forms of finance will give you a lump sum at the beginning of the term, and then you pay interest for as long as the amount is outstanding — whereas with a merchant cash advance the total cost is agreed upfront. That means instead of interest running constantly there’s a fixed finish line, and the lender will then get a percentage of your monthly sales for as long as it takes to pay back the total amount. This way you don’t have to worry about interest building up, or missing your repayments, because it’s all handled automatically. This flexibility comes at a cost though, and merchant cash advances tend to be relatively expensive.
Another useful way of securing funds is through money that customers owe your business. With invoice finance you’ll be given an advance based on the value of outstanding invoices. This is very useful when you haven’t been paid for the last job yet, but you need to spend money for the next one.
Many businesses have payment terms of anything from 14 days up to 90 days or more, which means invoice finance is really useful for tiding you over to the next payment. The lender can give you most of the money you’re owed immediately, and you’ll get the remainder minus fees when the invoice has been settled by your customer. This way, unpaid invoices don’t hold you back from taking on new challenges.