You’re looking to raise cash for your business, fast. Perhaps there is a piece of equipment you need to buy, or you want to open another office.
But the thought of taking out a bank loan makes you squirm.
A decade on from the 2008 crisis, banks are still making it difficult for small businesses to secure finance. You know that you’re going to have to jump through hoops with your bank manager. Somehow, visiting their office feels like visiting the headmaster as a child: Daunting.
You also know that bank loans are risky. What happens if you have a couple of bad months, and can’t make your repayments?
Business is stressful enough without having the threat of a loan default hanging over your head.
Then there’s the expense…. Those interest rates make your eyes water.
So what are your other options?
Luckily, you do have alternative sources of finance. Here are some you should consider, before taking out a bank loan:
Finance Lease or Hire Purchase: Do you need money to buy equipment? If so, a hire purchase arrangement might be the best option. This is in many ways a loan, but you’re borrowing the money from the company which sells you the equipment, rather than the bank. Your loan is tied to a specific product. And at the end of your payment term, you own it.
Many people take this option with a car, paying monthly instalments to the company until they own it outright. You can do the same thing with equipment.
The downside is that this can be more expensive over the longer term than buying it outright, but there’s less immediate impact on your cash flow.
Operating lease: This is a slight twist on leasing. At the end of the deal you give the equipment back. This is a good idea of you only want it for a short time, or it’s the kind of equipment which goes out of date quickly, such as IT. You can then organise a new operating lease agreement – it’s a cost-effective way to always have latest technology available.
With these deals you should always read the small-print carefully. What happens if your circumstances change? Do you have any flexibility to get out of the lease agreement? Never assume things will be alright – being stuck in an inflexible arrangement can be difficult.
Peer-to-peer lending: If the banks aren’t willing to lend, perhaps the crowd might do it. Peer-to-peer lending is growing, with companies such as Crowd Cube offering private individuals the chance to give loans to businesses.
Each business is given a credit rating based on the level of risk. This can be more affordable, but as with ‘regular’ business loans, you will still have to make interest payments.
Lending the money yourself: You might be able to invest your own cash in the business. If you decide to do this, you need to protect yourself in case things go wrong.
Set up the loan in much the same way as you would any other loan – that means taking security, arranging interest and a payment plan, just as any other lenders would do.
Friends and family might also be willing to help out with a loan. Again, set this up with all the professionalism and due process you would any other form of loan. You need to protect them too.
All these have their pros and cons – the decision depends on the exact circumstances of your business. But there is another option: to find the cash hidden within your company. Every company has some – I’ll tell you how to find it in my next Blog!
In the meanwhile, if you’re ambitious for your company but are not sure exactly how to finance its growth, let’s talk. We can help you organise your finances in the way that makes most sense.
