If you own a business which has felt the impacts of COVID-19, you may have struggled to find finances. Although many businesses have applied for financing from the UK Government, there still remain many businesses that are seeking alternative finance to keep their businesses going.
For those businesses that aren’t sure where to turn for finance, should consider looking at the three sources of finance for inspiration. There are three sources of finance to consider if you’re a small business:
- External sources of business finance: This type of finance is when a business requires finance from entities that are external to the business.
- Internal sources of business finance: Internal sources of finance is when a business sources funds from within the business. Most businesses that resort to internal financing have been trading for a set amount of time.
- Personal sources of business finance: Personal sources of finance is when a business owner uses personal funds to help finance elements of the business.
Below are some examples of different finance options for those who are looking to help fund their business. It should be noted that business owners should ensure they thoroughly research funding options before they consider applying for business finance to know the necessary risks involved.
Examples of external sources of business finance
Business loans can be obtained by going to traditional lenders such as a bank. However, during COVID-19, many banks have been more reluctant to lend to businesses, which may make them harder to receive. Often a business bank loan will require an applicant to provide a good credit score, a detailed business plan, and sometimes valuable assets to be offered as collateral.
If a high street bank isn’t a viable option for you or your business, you can try approaching an alternative lender or credit broker. The lenders are more likely to offer loans to businesses who may have bad credit or have been trading for a shorter period of time. The downside of these loans is that the interest rate may be higher in comparison to traditional lenders and may limit the amount of money you can borrow.
Merchant Cash Advance
A merchant cash advance can be a really effective option for businesses that receive a lot of card payments, such as retail stores and restaurants. A merchant cash advance is a type of financing that is repaid via the money you generate through future debit and credit card sales. There is no interest rate attached to a merchant cash advance. Instead, there is a fixed-fee which will also be repaid via future card sales.
This is an option to consider for small businesses whose business may be seasonal, which means it is in sync with a business’ cash flow.
Invoice financing is a useful financing option for small businesses that rely on invoices for their business. One of the key issues with invoices is having to rely on your clients to pay the invoices accordingly. Frustratingly, many clients fail to pay their invoices on time which can have negative consequences for small businesses who rely on invoices to run the business smoothly.
Invoice financing allows businesses to borrow money to cover unpaid invoices that a client owes a business. An invoice financing company will lend you part of the money you’re owed in the invoice. When the invoice is paid by the client, the business pays a percentage of the invoice amount back to the lender as a fee for borrowing the money.
It allows businesses to always have money in their pocket and means that they can maintain their cash flow effectively.
Examples of internal sources of business finance
If your small business is a limited company, then you may have access to share capital, which allows the business to raise funds internally. One of the founders of the company may offer up financing for a greater portion of the company’s shares. It can mean that the investor attains an equal amount of shares, which creates a co-ownership or the investor gains a controlling stake in the company, making them the majority shareholder.
This method isn’t for everyone, especially those who don’t want to relinquish their ownership of the company. So, remain cautious that the other investor is trustworthy and can help lead the business in a positive direction.
Selling assets is a really common way to free up some sources of internal finances for small businesses. Often the assets that are sold by companies are no longer used or rarely used by the business. In some cases, assets may be regularly used, but are sold to fund a more modern asset. For example, a business may sell a company car to help fund a new and more economical option.
Examples of personal sources of business finance
Personal savings and investments.
Personal savings are an option if you’re looking to quickly fund your business. As it is your own money, there is less pressure of having to repay your money back. People who opt for this source of finance usually give notice of withdrawal on their investments, withdraw their accrued savings, and put the money towards their official business capital amount.
However, the obvious risk of dipping into your personal savings is that you may not get that money back. Business owners should always leave some amount of money to live on, just in case of worst-case scenarios and especially as a result of the uncertainty in the pandemic.
Sale of personal property
Sale of personal property and assets are used by entrepreneurs who don’t want to put themselves in debt or are struggling to find a loan. It is commonly used by startup entrepreneurs who are looking to finance their business.
If you are selling personal property, you should ensure that they only sell property or assets that are not essential for your daily life.
If your business is struggling as a result of the pandemic, make sure to check out the Government’s advice and support for businesses. If you’re suffering from personal financial issues as a result of the virus in the UK, then make sure to check out Citizens Advice.