Types of business finance

In its Small Business Finance Markets report for 2018/19, the British Business Bank found that worries about Brexit were leading many small and medium sized businesses to cut back on their use of external finance – delaying longer-term investment and company growth.

The number of smaller businesses currently calling on external finance has fallen from 44% in 2013 to just 36% in the last 12 months.

But is this retreat from business finance – the lifeblood of any successful company – reasonably justified when there are currently so many different types and sources of funding available? Let’s just take a brief look:

Equity finance

  • venture capital – from private equity investors and business angels – appears to have become more widely known among businesses, says the British Business bank;
  • while business angels may show an interest in companies with sufficient signs of future growth and expansion, the price of their involvement is a share in the equity of your company – and, invariably, a say in the decision-making, explains the Business Finance Guide.

Debt finance

If you baulk at the thought of losing decision-making independence or at the thought of sharing in the fortunes of your business, however, debt finance – or borrowing – offers several other types of business finance.

Secured loans

  • so-called because lenders ask for collateral or security against the sum you are borrowing – and the security takes the form of company or personal assets;
  • this is likely to be the case if you need to borrow an especially substantial amount – by way of a commercial mortgage on property you are buying on behalf of the company, for example – when repayments on borrowing of this magnitude need to be spread over the long-term;
  • the extended duration of the loan also means that substantial interest repayments are likely to accrue over the term of the borrowing, when the interest rate may also be variable;

Unsecured loans

  • in a fast-moving business world, you may be able to respond to new opportunities by borrowing relatively smaller amounts – falling in the range of, say, £15,000 to £100,000;
  • with these smaller sums borrowed, you do not need to spread out repayments over the long-term, but might comfortably do so on a short-term basis of between three and 12 months – and significantly reduce the amount of interest you need to pay as a result;
  • short-term business loans such as this are typically unsecured – so, none of your company or personal assets are put at risk in the event of any default in repayments (though you clearly need to avoid any such default, which risks prejudicing any future application for loans or credit);
  • often offering their services entirely online, lenders of short-term, unsecured, fixed-rate business loans are often able to respond very quickly to your urgent need for such business finance – giving a decision in principle, for example, practically immediately;
  • if your subsequent formal application is also approved, the requested funds may be transferred to your company bank account in a matter of days;

Peer to peer lending

  • in recent years, says the British Business Bank, there has been a growing awareness of alternative sources of borrowing by way of peer to peer or crowdfunding platforms;
  • these act as effective matchmakers between individuals and organisations looking to invest or lend and businesses wanting to borrow from that pool of resources;
  • beware, however, that the Financial Conduct Authority (FCA) has expressed concerns about some peer to peer lending platforms and wants a tighter regulatory framework for them – as explained in an article by Norton Rose Fulbright in July of 2018.

Rather than defer or roll back your urgent needs for business finance while the dust settles on whatever terms for Brexit are agreed, why not consider the many options that continue exist for funding your short and longer-term business operations?