Whether you need to get your business up and running or your business growth has stalled, chances are you will need an injection of cash at some point. Probable reasons include marketing needs, new equipment, or a big order needs stock and staff to fulfill. Many people first think about asking friends and family or their bank manager, but there are many other funding options available. Let us have a look at some ideas you may not have thought of..

Friends and Family

If your business loan needs are small and your friends and family are close asking them for an injection of funds seems a logical option. However this may not be a great idea. Many people have said that you should never mix business and friendship and this can certainly be true. Problems with repayments can strain the best of friendships as can interference by well-intentioned family members seeking a return on their investment. There is also the tricky problem of whether to provide equity on your business in exchange for a loan – but did you really want your mum and dad to own part of your business? Before you go down this route for anything besides a low level, short-term loan, think about the effects of having your friends and family in your business or being beholden to them if you cannot repay as expected.

Believe it or not, whilst many business people approach their bank for business funding, not everyone is successful. Banks like to lend against assets and if your business does not have a home base such as a freehold office or a retail store that you own, then your company may have little to interest a bank. Of course they also take personal guarantees and your may find your own home being used as collateral. Bank loans undoubtedly have the lowest interest rates and often favorable terms, however for many business people the risk of losing all is often too much of a threat for them.

If the financial problem you are facing is one of cash flow in that you have suppliers to pay and your buyers are being slow to pay you then invoice discounting or factoring is a probably short term solution.

Invoice Discounting

With this type of loan a lender will look at your unpaid invoices and lend you a fraction of their value, often 80%-90%. You are responsible for chasing your buyers for the payment of the invoices. This money is then offset against the money you have borrowed. Obviously the lender will need to wait for repayment and risk non receipt, however this is not seen as a highly risky option. The business will receive its sales money on time, all be it not 100% of its value which smooths cash flow. The factor receives a fee and interest on the loan that depends on the risks and value of the invoices. The business is saved from advertising that it is discounting its invoices but has to rely upon its own abilities to collect the invoices. Non payment of invoices means the loan money needs to be found elsewhere so more risk lies with the company rather than the lender.

Invoice Factoring

With this type of loan you pay a fee to a factoring company who then take charge of your invoices. They then lend you a fraction of their value, typically about 85%. The factoring company will then chase the invoices on your behalf. When they receive payment they send the remaining money to the business. The factoring lender makes money via the fees and interest you pay them whilst waiting for payment. The advantage to the business is that they get their cash flow freed up and some expert assistance in chasing late invoices. The disadvantages are the fees payable and that some companies do not wish to deal with businesses that factor. The business may also lose close contact with their purchasers.

Invoice Trading

Another version of this is called invoice trading and it is where an individual invoice is used as collateral for a loan. Usually up to 90% is loaned and you also pay a small fee to set up the loan. It is still your responsibility to chase payment and if payment is not made by an agreed date, you will still have to repay the loan. The disadvantage is that the invoice must be from a very reputable, preferably blue chip organization. The risk falls upon the company although it is an answer to cash flow problems that beset small companies, particularly when they deal with large companies.

Crowd Funding

Crowd funding is where multiple investors are invited to invest in a company, usually a start up company or one launching a new product. The process relies upon social pressure and interest for investments. There are four types of crowd funding:

• Donation based: The first type of funding was started by Kickstarter and Indiegogo and involves multiple small investors reacting to the companys proposition by donating funds or pre-purchasing potential products. It is an excellent concept for starter companies, especially those that have innovative new products. Advantages to the company include available launch funds and no loss of equity in exchange for funds. Companies retain 100% control over both funds and products. There are strict criteria on both these sites as well as other similar sites as to what kind of companies and product launches are allowed. Donations can be very small, many as little as $25. Some sites do not allow for the funds to be taken unless the request is fully funded.
• Rewards based: In exchange for small funds the investor receives a small incentive such as first releases of the product, a product discount etc. It has the same advantages and disadvantages as donation based crowd funding.
• Equity based: The SEC changes in the USA enabled equity based funding and this brought in the ability for larger backers to invest more money with an eventual financial return in exchange for equity in the company. This is a good way for a company to raise money without obtaining a major shareholder. This type of crowd funding usually results in multiple small equity shareholders. One disadvantage is that if the funding goal is not reached the money is not released to them.
• Lending based: This is the same as equity based except the investor lends money as a formal loan. The company therefore ends up with several small loans to repay that can be troublesome but at least spreads their risk of being foreclosed on.

Peer to Peer Lending (P2P)

This type of lending matches investors seeking higher than normal investment returns, but are also prepared to accept higher levels of risk (companies seeking a loan who cannot or do not want to use a banking facility). There are two types of P2P platforms; consumer led and company led. There are many reputable companies available that can match companies with investors, many of them internet based.

In order to minimize the risk of the investor the company will need to submit financial records such as audited accounts, company records, business plan, records of existing debts and a full reason for the need to borrow funds as well as how these funds will be applied. High risk applicants may need to provide security. Small non incorporated companies can also borrow using P2P funds but they will usually need security from the company owners. The nature of P2P means that the investor generally chooses the company and not vice versa. This means that a companys financial information will be published for many to view, all be it within a closed environment. The high risks associated with this kind of lending means that the company also needs to have a good credit rating and few existing debts. On the plus side a P2P investor very rarely wishes to become involved in the company, instead seeing it as a high return, high risk investment. That last concept means that the cost of borrowing is also higher than many conventional loans.

This type of borrowing is ideal for a company with few physical assets such as an internet based company although guarantees will usually be. Other advantages are that these types of loans are often faster and less complex than bank loans and there are few penalties for early repayment. Additionally the borrowing company may be able to return for further loans much more easily once the first loan is repaid.

Pension Led Funding

Lastly we have borrowing against the value of the directors pension. Some countries such as the USA and the UK allow this; some do not so please check. It is a formalized borrowing arrangement whereas the directors pension fund is used as a collateral against a loan. It is ideal for companies that have built up this kind of asset and have few other assets that can be collaterized. However it does risk an asset that will be of use in the future.

Whichever funding option you choose you are going to probably need a business plan. Get this written with the help of an experienced business consultant or accountant. The rigors of this process may mean that you might find that you do not need that loan after all.