Which type of funding is right for my business?
Working capital or short-term loan
What is it: Working capital is used to finance a company’s everyday operations including stock, payroll or taxes. It is a short-term loan and can’t be used to finance long-term assets. Repayments are negotiated upfront and are either fixed (paid back in a certain period) or flexible (when funds allow).The loan can be either secured (with assets provided as collateral) or unsecured (the borrower signs personal surety). Bear in mind that this type of funding can have a longer approval time and higher interest rates are charged for an unsecured loan.
Advantages: Working capital can help to keep your business afloat when cash flow is slow.
Inventory financing
What is it: This type of funding addresses the shortfall between cash coming in and cash going out and helps businesses buy stock. It is usually a short-term loan. Inventory loans are usually unsecured and granted based on past business performance.
Advantages: Application and approval processes are usually quick. Most lenders only require companies to be up and running for between 6 and 12 months which allows newer businesses to access credit quickly.
Bridging finance
What is it: This is a loan which covers short-term gaps in funding. It is used when a business is waiting for expected funds to arrive and to ease pressure on working capital. Repayment terms range from 6 to 12 months.
Advantages: Applications are often online requiring only minimal documentation. Approval is usually quick ranging from 24 to 72 hours.
Purchase order funding
What is it: This type of finance is when a lender agrees to buy materials or source goods on behalf of your business. The lender takes back their share of the profit once you have been paid by your customer. This type of funding bridges the gap between order and payment.
Advantages: The benefits of this type of funding is that it is convenient and does not require credit checks or an affordability assessment. Most applications are online and successful applications are approved within a few days. Although no interest fee is charged, a flat fee usually applies.
Common terms you need to know:
Principal loan amount: you will be required to repay the full loan amount back to the lender
Interest rates: in addition to the principal loan amount you will need to pay interest on the loan amount. Interest rates will vary depending on the level of risk involved. Agree the interest rate in advance with the lender
Additional fees: other transaction costs may be added to the loan amount
Repayment options: how much the business will be repaying – and when. These need to be agreed upfront with the lender
Trading history requirements: most lenders require that the business generates a certain amount of revenue and profits before they will approve a loan
Affordability: can the business afford the repayments
A final thought:
Make sure you understand the terms and conditions of the loan, the repayment terms, interest being charged and transaction costs. Ensure that you meet all the conditions included in the loan agreement.
Key Takeouts:
The type of funding you apply for depends on the needs of your business.
