When it comes to managing your startup, one of the biggest problems you’ll face will be a lack of financing to get you off the ground. Borrowing money can seem daunting, but if you just need a little bit of cash to help with the launch or to stay afloat in the first few months, then you may not need to borrow big to keep things stable. There are a number of options available to businesses who don’t want to turn to the bank – and today’s article is designed to help you decide the best solution for your business.
Factoring
Factoring is one of the oldest and surest methods of financing in the business sector. Also known as ‘accounts receivable financing’, factoring is what happens when a borrower – your startup – sells their invoices to a financial institution for a percentage of their face value, paid in advance. The factor – the financial institution – then handles the transaction and takes a small (usually around 3-4%) fee for their trouble.
The benefits of this type of funding are threefold. Firstly, there is the obvious benefit of cash advances, which startups find particularly useful when trying to build up reserves. Secondly, it’s really convenient, ensuring that any problems you may have with client payments are dealt with by a third party. And finally, any investors could see a quicker ROI than they are used to, meaning that you’re more likely to attract more money in the future.
Personal loan
Using personal loans to fund startup businesses is not a new idea, but in the current financial climate, with banks hesitant to give out business loans, it is a positive step towards getting your hands on the money you need as a startup business. Firstly, unsecured personal loans are far easier to get hold of than business loans, as banks have become more risk averse in recent years. While there may still be a stigma around borrowing the money you need, there’s no need to feel uneasy when borrowing money from a trusted finance broker – as this is a legitimate way to get your business the funds it needs to get off the ground.
Personal loans allow you more freedom than a private investor because you retain equity, meaning you have more control over the direction of your business and it’s more valuable to you in the long run. Couple this with repayment schedules allowing forward financial planning on a long-term basis, and using a personal loan to bulk up your startup’s finances looks like a strategy that deserves some consideration.
Business angels
Impressing private investors does mean sacrificing equity, but by doing so you may gain a valuable business partner and the cash you need without having to go through big banks or getting stuck in repayment schemes that are weighted in favour of the bank. Most private investors have plenty of business experience, as private equity firms require lengthy CVs and impressive business histories from their potential employees. Their experience is, therefore, invaluable in the brutal world of business.
What is useful about private entrepreneurs is that they have more financial freedom than a bank, and will potentially be willing to invest more if they believe they’ll see a worthwhile return. Another element that separates private investors from banks is that they don’t require ‘repayments’ as such, like banks do, but rather make their money when your business succeeds – meaning that they’re as personally invested as you are in making sure your business thrives.
Essentially, you don’t need to borrow large chunks of money from big banks or commit to complicated repayment schedules in order to keep your finances stable. Your options when it comes to funding are many and varied, and you shouldn’t feel tied to borrowing big. Instead, explore other channels and take advantage of the many forms of finance that are available to startups.
Amanda Gillam is a Content Writer for Solution Loans – a technology-led finance broker bringing a broad range of personal finance products to people across the UK.
Do you have any finance tips for fellow entrepreneurs? Tell us in the comments below!
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