When you own a small business, chances are you’ll need some sort of outside finance.
There are all sorts of set up costs involved in business, and even when the business is making money, that doesn’t always mean you can cover the level of investment that’s required to help the business to grow.
The thing is, as a business owner, you’re probably not a finance expert. You’re an expert in whatever your business is. So how do you even know where to start in getting small business finance?
This is the ultimate cheat sheet in small business finance options.
Just about all new businesses get some sort of startup finance to help them get up and running. Money is a genuine barrier to entry, and there are any number of things that new business owners need to pay for:
Even if you have the money to pay for everything you need, you’ll need to have a leftover amount to cover operating expenses from there. It can take months, or even years, before some businesses are able to cover their own costs, let alone make a profit.
Without a healthy bank balance of your own, you’ll need some sort of funding to set yourself up with the best chance of achieving your goals.
The first step in getting funding is understanding the lingo. The world of finance is full of technical terms and jargon that many normal people just don’t understand.
This is especially the case when it comes to financial reporting, and some of the financial statements that you need to produce in order to get some types of funding.
An income statement is known by a few different names, including a profit and loss statement, and income and expenditure statement. It details and itemises all of your income and expenses to show how much money you’re making (or losing).
Your income statement looks at a given period of time to understand what revenue came in, what expenses went out, with the balance being the profit you made.
A balance sheet statement is a record of a business’s assets and liabilities. It includes the cash it has on hand. Unlike the income statement, the balance sheet shows a certain point in time.
You can use a balance sheet to see the assets you own, the liabilities you owe and so how much equity you’ve built up in your business.
A cash flow statement is similar to an income statement, but there is one key difference. It also shows money going in and out of a business, but importantly, only at the point where money actually changes hands.
For example, if you’ve sent an invoice for work you’ve done, that will be included on your income statement. But if your customer hasn’t paid the invoice yet, and you don’t have the cash on hand, it doesn’t appear in the cash flow statement.
It only will when the customer pays and you actually get that money coming into the business.
There are a lot of different types of financial help for small businesses. These are some of the most common:
Bootstrapping is when the company can fund itself internally with the money it makes. It can take some time to grow a company this way, as it’s difficult to finance large investments, but it allows a company to grow without taking on any liabilities along the way, or selling a stake in the business.
Self-funded businesses are financed solely by their founders, without any contribution from anyone else.
Borrowing from friends and family can help to avoid paying interest on small business start up loans, though it comes with a warning. It’s important to have a written agreement that dictates what all parties are responsible for, in case the arrangement turns sour.
A partner is someone else who works with the founder to grow the business. They don’t have to be actively involved – a silent partner is one who has an ownership stake, but doesn’t participate in the running of the business.
For business founders, this may mean giving up a share of the business, but having a wealthy partner can really help to fund and grow the operation.
Crowdfunding is a more recent form of small business finance that involves appealing to the general public for finance. Anyone can donate any amount of money, and the business may offer incentives to encourage people to contribute.
There are a number of specialist crowdfunding platforms that can be used, including Kickstarter, GoFundMe and Patreon.
Many business owners will automatically think of borrowing from a bank to finance their startup.
Bank loans are great if you need a large amount of up-front cash, but getting a business loan isn’t always easy, and it can take a lot of time and effort. They will require security, so often your family home will be on the line. If your business fails you can potentially lose whatever collateral the loan is secured against.
Bank loans can be short or long term, and will incur interest and other regular fees for the period of time it takes to repay what you borrow.
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There is a wide range of financial help for small businesses available through both central and local government funding platforms.
Sector-specific funding, funding for research and development and a whole lot of other business activities is out there – you just need to go looking for it. This can take some considerable time to navigate and apply for.
If you use regular suppliers or contractors, you may be able to get initial work done on credit to help you get up and running.
Credit line business financing is great for establishing a growing relationship with providers who’ll be influential in your growth.
Invoice financing is a great form of business finance for promoting cash flow without getting into large debt. It involves having a dedicated invoice financing service lend the value of an outstanding invoice, which you repay once your customer pays their balance.
It can take weeks, or even months, for some customers to pay their invoices, and invoice financing helps you to pay overheads and other costs that are due in that time without having to dip into your own bank account.
With so many small business finance options, how do you choose the best one for your business?
Some options will depend on your current financial situation – for example, many business owners just won’t be able to finance a new business themselves. Getting financial help may be the only option.
Plainly, the cost of finance is something you’ll want to keep as low as possible. Bank loans are difficult to obtain and require significant security compared to many alternatives, but they do enable business owners to borrow larger amounts.
It’s often a good idea to start with the cheapest form of finance and exhaust the options from there. This helps to keep costs down while also minimising the impact of borrowing.
However you ultimately end up financing your small business, invoice financing should be in the mix. It’s a great standalone form of finance, but it can also be used alongside other funding options to keep costs down and give you flexibility to ride the peaks and troughs of business.
With FundTap, business owners have the freedom to select when you use invoice financing. This means you can give your cash flow a boost when you need it, and you won’t be charged when you don’t. Many other providers require business owners to use invoice finance for every invoice.
Invoice financing starts from as low as 4% of the value of the invoice, and there are no setup fees, admin fees, or interest on borrowing.
Because it’s so flexible, it’s often used on top of bank loans to allow business owners to cover temporary costs without having to borrow extra at higher rates or for a length of time where you don’t have a consistent finance need.
As a form of short term business finance, invoice financing also helps businesses to grow without getting into a lot of debt. Borrowing is repaid as soon as the invoice is paid, leaving you to run the business without ongoing liabilities.
Businesses that use FundTap have grown revenue by 54% over the past two years, because they’ve had the cash when needed to run and grow their business.