Compare and choose financing options to find the right source of funding for your business.
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 a huge 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.
Here are some options you could apply for your business
What types of business finance are there?
Business finance options can be split up into three main categories:
- Debt finance. 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.
- Equity finance. 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.
- Internal funds. 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.
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 cash flow 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.
- Where is your business in its lifestage? Your business’s lifestage 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:
|Loan type||Loan amount||Pros||Cons|
|Business term loan||$5,000 to $500,000|
|Business line of credit||$10,000 to $1,000,000|
|Business overdraft||$10,000 to $100,000,000|
|Business credit card||Depends on card limit|
|Invoice financing||80% of the invoice amount|
|Equipment finance||Cost of business equipment you need to purchase|
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:
|Funding source||How it works||Pros||Cons|
|Angel investors||Groups or individuals provide funding to businesses in the hope of enjoying substantial capital gains on their investment in the future|
|Venture capitalists||Venture capitalists invest in startup or early-stage businesses, providing funds to help your business grow in return for equity in the business|
|Public float||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|
|Crowdfunding||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.