How to determine your business financing options
Compare and choose financing options to find the right source of funding for your business.
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Whether you’re starting a new business or looking for ways to help your existing business grow, having sufficient capital to fund your plans is essential. However, with such an extensive array of business financing options to choose from, selecting the right one for your business can be a confusing and complicated task.
Let’s take a closer look at the business loan and funding options available to you, and how you can determine the best type of financing for your business.
What's in this guide?
- Five questions to determine your business's financing needs
- Business financing options
- What business finance options are there?
- How do I determine what type of finance my business needs?
- What types of business debt loans are there?
- Compare invoice financing products
- What types of business equity sources are there?
- Using internal funds to finance growth
- Frequently asked questions
Five questions to determine your business's financing needs
To decide whether your business needs financing, it's a good idea to ask the following questions:
- Is my business doing well? Although it sounds counterintuitive, it's generally a bad idea to look into financing - especially loans - if your business is struggling. Not only will you not qualify for many financing options, but you also risk getting caught up in a cycle of debt if you can't repay any finance you do take out.
- Are some seasons more profitable than others? Among the few times financing could be a good option for a struggling business, is when it suffers seasonal losses. Having access to extra funds can keep you afloat in the off-season until sales pick up and you're able repay more easily.
- Do I need to build my credit? Consider taking out a small loan you're certain you can repay. By building up your business's credit score. Building up your credit score will ensure that you're likely to get better rates on future loans.
- Am I ready to expand? Business financing can be that extra push to making your business more profitable in the long run. But, make sure your business is ready for that kind of growth first.
- Can I afford to buy all the equipment I need to run my business? If a lack of equipment is holding you back, it might be worth looking into business equipment financing.
Valiant Finance works with a large panel of lenders that can help you find a loan for your business.
- Access to 60+ lenders
- Dedicated credit specialists
- Various loan options available
Business financing options
What business finance options are there?
Business finance options can be split up into three main categories:
This is the type of finance most people associate with business funding. With debt finance, you borrow money from a lender (ie, you take on a level of debt) and then pay it back over a predetermined period. Loans are available from banks, non-bank lenders and online lenders, with secured and unsecured loans available to suit an extensive range of purposes. On the downside, you’ll need to put your business profits towards paying off the debt.
Rather than borrowing money from a lender, equity finance sees your business acquire funds from angel investors, venture capitalists or from listing your company on the stock exchange via a public float. You can even source the necessary funds from family and friends who are willing to put their money where their mouth is to support your business idea. The advantages of equity finance are that you may be able to raise a substantial amount of money without taking on any debt. However, finding suitable investors can be a time-consuming process and you may need to give up some control of the business.
The final finance option is to use your cash flow and business profits to provide the capital you need. While this means you don’t have to worry about taking on debt and repaying any borrowed money, it can affect your cash flow and lead to financial difficulty if your business experiences a downturn.
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How do I determine what type of finance my business needs?
To work out which type of finance is the right fit for your business, consider the following questions:
Why does your business need the loan?
Are you looking to start a new business from scratch, upgrade your equipment, overcome a cashflow shortage or solve one of a myriad other business challenges? For example, if you’re looking to invest in new business equipment, you’ll want to consider your equipment finance options.
What stage is your business at?
Your business’s stage in its lifetime has a big impact on its financial requirements and therefore on the type of finance you should choose. Our guides to business borrowing can help you understand your business needs and finance options, regardless of whether you’re a startup, early-stage business, going through a period of high growth, running an established business, reinvigorating a stagnant business or looking to turn around a business in decline.
What’s the state of your business finances?
The current financial performance of your business will not only affect the type of funding you need, but also your ability to qualify for different types of loans. Your credit history will also affect the range of financing options you are able to access.
What industry is your business in?
The industry you’re in also affects your funding needs and finance options. It goes without saying that a retail store will have different financing requirements to a microbrewery, which will in turn have different needs to a beauty salon.
Once you’ve answered these questions you’ll have a better idea of which type of finance is right for you. Then it’s time to start comparing the different loans and sources of funding available.
What types of business debt loans are there?
The table below features a rundown of all the business debt finance options available to help you grow your business:
|$5,000 to $500,000|
|$10,000 to $1,000,000|
|$10,000 to $100,000,000|
|Depends on card limit|
|Cost of business equipment you need to purchase|
|80% of the invoice amount|
Compare invoice financing products
What types of business equity sources are there?
If you think equity finance is the way to go for your business, consider the funding sources outlined in the table below:
How it works
|Groups or individuals provide funding to businesses in the hope of enjoying substantial capital gains on their investment in the future|
|Venture capitalists invest in startup or early-stage businesses, providing funds to help your business grow in return for equity in the business|
|Raise capital by listing your business on the Australian Securities Exchange (ASX) so investors can purchase shares|
Family and friends
|Your loved ones and friends provide funds to help you grow your business|
|Investors pledge money to support your business through online crowdfunding platforms. In return they get perks and rewards, or in some cases equity in your company|
Using internal funds to finance growth
The final business finance option is to finance the future development of your business from your own profits. Of course, this approach also has its own benefits and drawbacks:
- You don’t take on any debt. Borrowing money always comes with a level of risk attached; using your own money removes that risk.
- No repayments. When you use internal funds to grow your business, there is no need to worry about the effect of ongoing interest charges and whether or not you will be able to afford your regular repayments.
- You stay in full control of your business. With no investors or shareholders to keep happy and no lender to repay, you can retain full control of your pride and joy.
- May not be enough money available. Your profits may not provide sufficient capital to fund your growth or expansion plans.
- Can cause problems if you experience a downturn. If cash flow dries up and your business experiences a difficult patch, having money in the bank can be crucial to see you through until times improve.
Business financing is a complicated area and there are myriad options available. Consider the needs of your business carefully before choosing any one option, and if possible seek expert advice from your accountant.
Frequently asked questions
What loans are available for struggling businesses?
In general, take caution before taking on debt if your business isn't doing well. If you decide that you need outside funding, you might want to consider a crowdfunding campaign to raise money from your social network and fans. Or look for an investor, if you're certain you can convince them you're able to turn things around.
Can I get a small business loan with poor personal credit?
You might be able to get a small business loan with poor personal credit, because business loan rates don't always rely on your personal credit score as much as personal loans do.
But it's still a factor. To get lower rates, consider applying for your business loan with a cosigner with higher credit or look for a secured loan.
Can I start a new business with a loan?
It can be hard to find a loan for startups. And for good reason: Most businesses fail within their first few years, which could leave you with a lot of debt and the loss of any collateral. Most lenders are wary of businesses that haven't yet proved their might for at least six months.
What do I need to know before I apply?
Four numbers that are important to know before you apply are your current ratio, debt to service ratio, operating income and credit score. That's in addition to things like your financial projections and overall business plan.
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