When you have the business idea of the century in your hands, then there is no stopping you from revolutionising the industry. However, even if you know the source from which you are going to raise capital, do you know the type of finance for business you are looking for?
Well, various financers offer several types of business finance to facilitate the purchase of assets, take care of daily operations, and pay for liabilities. It is up to you to decide which options your company needs. So, here is the breakdown of various types of finances available for your business.
- Asset Finance
When you want to establish a workspace or a production unit for your business, the first thing you will have to think about is bringing in the equipment such as computers, machinery, and other office equipment. While you are not planning to purchase them, even leasing assets can involve huge costs that you might not be able to fund on your own. Therefore, various financers provide asset finance.
- Asset finance allows you to bring in more advanced machinery which would have been too expensive otherwise.
- The loan is secured against the assets. Therefore, if you are not able to repay the interest, you will only lose the asset, no collateral.
- The leasing company carries the risk of breakdown of the asset.
- The interest rates are fixed.
- Capital allowances against leased assets cannot be claimed unless they are 5-7 years in use.
- Asset finance can prove more expensive with monthly interest than buying an asset outright.
- Advance payments have to be done for some portion.
- If it is a long term contract, the cancellation is challenging.
- Business Loans
You can obtain finances from a variety of sources for your business such as banks, alternative financers, etc. they can either be on a secured basis against collaterals and unsecured basis depending upon your credit score and personal guarantee.
The interest on such loans is subject to the length of the loan, the amount you borrow, and the collateral you offer as security against the loan.
- You can pay back the loan in pre-decided, monthly instalments.
- You do not have to let go off the ownership or stake in the business.
- There is a lack of flexibility in loans as they require you to pay additional charges even when you are repaying early.
- Monthly repayments can be tough if the money is not coming in regularly.
- There is a risk of losing the personal property if you have used them as collateral.
- The interest rates can change according to increasing inflation, making it difficult to repay them.
- Commercial Mortgage
When you start the business, apart from the equipment, you need premises to register your business. By far, this is the most expensive investment that you are going to make in the business. Therefore, you can finance it through Commercial Mortgages, which include expanding the existing premises, making commercial investments, and buying business premises finance.
- The ownership of the business and the premises can be retained.
- Rental fluctuations do not apply to commercial mortgages, giving you greater flexibility into running your business.
- Managing and forecasting finances and the future of the business becomes easier with lower interest rates as compared to other unsecured loans.
- The interest in commercial mortgages is tax deductible, reducing your business’s overall tax burden.
- You can also sublet a part of the premises till you don’t expand if the lender agrees.
- You need to have a decent sized deposit of money to be used in other operations.
- When you have a rented property, you can easily move your business after the termination of the agreement. However, if you own the premises, it is harder to move.
- If your lender offers to accept mortgage for a variable rate, you are making yourself vulnerable to an interest rate that can increase anytime.
- Maintenance, insurance, and security of the loan are not taken care of by the lender, but you.
- As the value of the property decreases, your capital falls too.
- Equity Funding
The companies who are looking to venture into a new market, introduce new products, or expand their existing line of operations, need expansion capital or growth equity. This is because they are looking for a significant amount of funds which cannot be sufficed by their profits.
- When the business opts for Equity funding, they can get access to business expertise, which can give them a better insight into how to facilitate the growth of their business.
- Access to better legal, tax, and human resources.
- An opportunity to tap into the financier’s connections for better business opportunities.
- Loss of a considerable chunk of the company’s ownership makes business answerable to its investors.
- If the size of investors’ stake in the business is huge, you can lose the majority of control.
- Invoice Financing
If the Accounts Receivables in your business are increasing, you can get some liquidity out of them by applying for invoice financing. This option allows you to take the money out of the business credits after some amount has been deducted.
Also, your lenders can either discount your invoices on the entire book and pay you back a percentage of it, or select the bills that they want to fund exclusively. The cost is charged only on the invoices funded by the lenders.
- Invoice funding helps you improve the cash flow of the business without having to wait for days and months.
- The release of invoice finances provides greater working capital, increasing flexibility.
- Invoice discounting is an entirely confidential process.
- Some factoring options also come with insurance against bad debts and defaulters.
- Sometimes the lender might bind you to sell your debtor’s book for a period of 12 to 24 months.
- Invoice factoring is not confidential as the lender will use all possible methods to get the money out of debtors’ pockets.
There you have it! Now you can use any of the above finance for business according to the requirements. However, remember to take a thorough look at the costs they come with and the disadvantages they offer so that you end up incurring further debt.