Every business needs to consider creative funding solutions at one point or another. Try as business owners might to never experience cash flow shortages, unexpected circumstances commonly force both small businesses and large limited companies to consider finance options that will bail them out of potentially growth-killing dry spells. Instead of resorting to guesswork and leaping at the first solution a mainstream lender or another type of finance provider offers, learn all the details about business finance solutions that will help you develop an effective long-term business plan.
What Is Business Finance Solution?
A business finance solution is a type of financial agreement that provides a business with the working capital it needs to continue pursuing growth. There are quite a few different types of business finance solutions, but they all share the goal of greasing the wheels of commerce to help vendors, customers, and other parts of the supply chain grow and prosper.
Up until recently in England and the rest of the UK, it was only possible to pursue the business finance solutions offered by traditional lending institutions. From startup loans to long-term revolving lines of credit, however, cutting-edge digital solutions are now offering alternatives to the rusty old business finance model. These days, it’s easier than ever for businesses to pursue flexible business finance options that offer fair and flexible solutions to periods of slow growth.
What Types of Business Finance Solutions Are There?
There are tons of different kinds of business finance solutions. Here are just a few examples.
1. Invoice Finance
Invoice finance is a business finance solution in which a company sells its invoices to a bank in exchange for cash up front. This type of finance solution can be beneficial to both vendors and buyers; vendors receive a portion of the money they need to operate their businesses without having to wait, and buyers receive longer repayment windows for paying back the full values of their invoices.
The two major kinds of invoice finance are invoice factoring and invoice discounting. Invoice factoring requires relatively intensive involvement from both the vendor and the buyer; when the vendor sells its invoices to a bank in an invoice factoring agreement, the bank also takes over credit control for the invoices, which means that the vendor’s customers now must pay the bank instead of the vendor.
Banks usually won’t offer more than 85% of the value of an invoice upfront in an invoice factoring agreement. When the invoice is paid, the bank will deduct interest and fees from the remaining amount and give it to the vendor. In an invoice discounting agreement, on the other hand, it’s often possible for vendors to get slightly larger portions of the value of their invoices upfront, but the bank doesn’t take over credit control in this type of agreement. It’s, therefore, possible for vendors to keep invoice discounting agreements confidential and avoid telling their customers that they are pursuing this form of finance.
2. Business Loans
In most cases, the terms “business loan”, “commercial loan”, and “term loan” are used interchangeably. A business loan is what most people imagine when they think about loans. This type of finance involves a bank offering a business a certain amount of money, usually in exchange for collateral, for a designated period of time.
For instance, a business loan might provide a company with £10,000 in cash in exchange for ownership rights over a piece of heavy equipment with a repayment window of six months. In the event of a default on the payment, the bank has the right to seize the asset used as collateral.
Some business loans might be unsecured, but these types of loans come with higher interest rates and tighter terms. Once a company pays back a business loan in full (plus interest and fees), the bank considers the loan to be closed, and the company can pursue another loan if desired.
3. Asset Finance
Asset finance is when a company buys a new, high-value asset by offering the bank ownership rights to the asset in exchange for the asset’s value. If you want to buy a new heavy truck, for instance, you can ask a bank to buy the truck for you and pay the financial institution back over time in exchange for equity on the asset. There are a few different kinds of asset finance, and business professionals sometimes use this term to describe asset-based finance, which is when a company gains working capital by offering a bank ownership rights to one of its existing assets.
4. Trade Credit
Trade credit is any form of a financial agreement that allows a buyer to purchase goods from a supplier without paying immediately. Whenever a company offers an invoice for an order, for instance, that’s an example of trade credit. Other forms of trade credit, however, can get relatively complicated.
Asset finance is a form of trade credit since it allows buyers to make purchases and pay later. In addition, the internet age has ushered in new forms of trade credit that eliminate the need for a bank entirely and offer customers the options to use financing to make purchases with simple PayPal or Amazon Pay-like interfaces.
5. Equity Finance
Equity finance is when a company sells shares of its equity in exchange for cash. Technically, all public companies engage in equity finance because they sell shares to shareholders. Many businesses take part in initial public offerings (IPOs) that can provide immense amounts of startup capital. If you want to remain a private company, however, equity finance is off the table.
6. Mezzanine Finance
Mezzanine finance is a type of business finance solution in which a company offers a bank recourse to its equity in the event of default on a loan payment. In a mezzanine finance agreement, a business essentially uses its equity as a form of collateral. Banks consider mezzanine finance to be high-risk, which means that it’s associated with high rates of interest.
7. Digital Finance
Alternative finance solutions are becoming more and more popular by the year in Manchester and every other UK city. Startups can now rely on alternative business finance solutions to receive peer-to-peer capital; in some cases, these deals require selling equity, but it’s also possible to crowdfund startup capital without having to give anything away.
Sometimes, however, waiting for funds to trickle in from random people isn’t enough to keep even the smallest startup afloat, and big companies need to have access to high-value and consistent finance solutions to survive. Recently, companies like CreditDigital have expanded on the traditional benefits of invoice finance to offer low-interest and highly rewarding business finance solutions to companies across the UK. These services are set to dramatically reshape the landscape of business finance both at home and abroad.
How Does Business Finance Work?
With so many different kinds of business finance solutions available, it can be hard figuring out exactly how these finance options work. Here’s a detailed breakdown of each of the steps you’ll need to take to secure a business finance solution for your company:
- Determine your exact needs: You’ll need to decide exactly how much financing you need and for how long before you make any type of agreement. An overly aggressive bank might try to get you on the hook for a high-interest loan that provides more money than you need if you aren’t careful.
- Consider your options: Remember that working with a traditional bank isn’t the only path you can take as you find a business finance solution that works for you. Consider all your options carefully before you proceed.
- Make an agreement: Contact your bank or business finance provider of choice to make a financing agreement. With some cutting-edge finance tools, you might not have to contact a business finance provider at all to get started.
- Get the funding: Whether you’re receiving cash upfront, extra time to pay invoices, or a line of credit, now’s the time for the finance provider to make good on your agreement. Take the funding, and use it to grow your business.
- Pay it back or close it out: Once you’ve achieved the growth you need to add to your working capital, pay the money back to the lender or close out the lending agreement. In some cases, this step may occur automatically when you make the final payment on your loan.
Benefits of Business Finance
Business finance provides businesses with the capital they need to grow today. Money that you have today is worth more than money than you have tomorrow because you can achieve growth, which results in long-term revenue increases, with money you have at your disposal right now.
While all business finance solutions offer the same core benefit, some of these agreements are better than others. Certain business finance solutions might offer additional benefits like low-interest rates, relaxed repayment windows, and simple applications or user interfaces. If the process of securing funding for your business is clunky or inefficient, many of the benefits of business finance disappear.
Without business finance, lots of major corporations would never have come into existence, and many innovations that we take for granted today would never have made it past the drawing board. Every business needs a boost now and then, and with the advent of new, digital-based finance technologies, it’s become easier than ever for businesses to get started or make it through rough patches with business finance.
Pros and Cons of Business Finance
Here are a few of the pros and cons of business finance that you should consider as you go forward:
- Business finance promotes growth by giving your business the capital it needs today to survive and thrive
- Business finance solutions are becoming easier to use every year with the advent of modern technology
- Provides businesses with the ability to get through dry spells or transition to long-term forms of finance
- Traditional financial institutions may impose hefty interest rates or fees
- You may lose your assets if you default on a collateralized business loan
Business Finance and CreditDigital
Here at CreditDigital, we feel that business finance is one of the most useful solutions any business owner can have in his or her toolkit. Unfortunately, many of the business finance solutions offered by traditional financial institutions are clunky, outdated, or unfair to borrowers. No matter what, you’ll have to make a couple of phone calls to arrange a business finance solution if you work with a traditional bank, and many of these types of financial services require extensive application processes.
CreditDigital builds on the successes that business finance has achieved in the past to offer companies a better solution for the future. Our platform operates on similar principles to invoice finance; we offer vendors cash upfront for invoices, and we offer customers extended repayment windows.
Instead of offering vendors a mere portion of their invoice values upfront, however, CreditDigital provides suppliers with the full 100% of their invoice value they need to keep their businesses growing. What’s more, we offer buyers up to 12 months to pay their invoices, and we provide 0% interest options.
The best part of CreditDigital, however, is our intuitive and streamlined interface. Once a vendor is set up with our next-generation service, the option to “Pay with CreditDigital” will simply appear at checkout. Buyers can then select this option and receive instant approval for most purchases. Instead of having to deal with the complicated demands that banks impose, you can make B2B purchases as simple as buying something on Amazon with CreditDigital.
Vendors love the fact that we offer full credit control services with no recourse. We don’t even ask for personal guarantees. CreditDigital is the first service of its kind in the UK, and we’re leading the way in ease of use and customer satisfaction.
As you learn more about business finance, it might be helpful to be an expert on the following terms:
Commercial finance is another term for business finance. In some contexts, “commercial finance” may have more of a big-business connotation, but all the forms of business finance we’ve covered can also be referred to as forms of commercial finance.
Also called an asset-based loan, a collateral loan is a type of lending that a business or an individual receives from a financial institution in exchange for recourse to seize an asset in the event of default. For instance, you might use your house, your inventory, or your assets to receive a collateral loan. These types of loans generally have relatively low-interest rates.
An unsecured loan is a loan that isn’t secured with collateral. These types of loans are riskier for banks, and as a result, most financial institutions impose higher interest rates and larger fees for this type of financing. If you default on an unsecured loan, your bank will have a much harder time recouping its losses than it would with a collateral loan.