Our experts have listed some funding options below along with risks that can hinder the start of a business or derail the growth plans for a business. Our commercial finance lawyers offer practical advice to business owners by telling them to keep an eye on cash flow, forecasts and key cash metrics including debtor and creditor days, as well as gross profit margins.
Typical bank loans are still a popular source of funding options for many businesses and start-ups. But it would be prudent to do your research on the various types of loans and the terms and the interest rates that come with each loan. This funding option is suitable for a business that has a good relationship with its bank and is able to present a viable business case. One of the advantages of a bank loan is that it offers low interest rates, depending on your credit score and you will not have to give up any control over your business.
However one of the disadvantages of a bank loan is the cumbersome process of getting a bank loan and the security you may need to give in return.
Short-term loans sometimes called ‘payday loans’ are seen as funding options which can improve working capital, boost cash flow or kick off a project. This funding option may work for your business if you are simply bridging a gap and are confident your business will have the funds to make repayments on time. One of the advantages of this funding option is that this funding option process is relatively quick if you qualify. However, the disadvantage of this funding option is that the rate of interest under the short-term loan can be extremely high and costs can quickly climb up.
Angel investors are wealthy individuals who provide funding in exchange for a share in your business. Some investors work in groups, whilst others work on their own. Business angel investments are not suitable funding options for a business which want to retain 100% control of their business. One of the advantages of this funding option is the investors will have experience and should be able to offer valuable business advice and guidance. However, one of the disadvantages of this funding option is that that you will have to give up control of your business to some extent.
Under this funding option venture capitalist are the investors who put in a considerable amount of money – traditionally a much larger investment than an angel investor would provide – in exchange for equity in your business. Often their objective is to help the business to grow quickly, so that they can realise a good return on investment in a short time frame.
If you’re a start-up business with high growth potential and do not mind giving up some equity, venture capital funding is a funding option to both secure funding and mentoring. One of advantages of this funding option is that in addition to the funding, venture capitalists offer expertise to help develop the business, such as contacts in their network. One of the disadvantages of this funding option is that you will most likely lose a large chunk of your business, because of the significant amount of funding provided.
With this funding option you raise the total amount of funding you need from the general public through social media. People can either lend you the money (peer-to-peer lending) or take a stake (shares/equity) in your business. It is most suitable funding option for businesses with a great proposition that will attract plenty of attention.
- One of the advantages of this funding option is that the larger the pool of people you can reach, the more chance of getting a good deal.
- One of the disadvantages of this funding option is that it can take a long time to hit your target funding, and you may have to invest a lot of time in publicity.
Contact our team of commercial finance lawyers to see how we can help you grow your business and the provide advice on funding options available to you.