A guide to raising business debt finance

2 people laptops office 1920x1023 - A guide to raising business debt finance

Raising finance for debt in business is often a different concern to raising finance for debt in our personal lives. In fact, according to The Debt Advisory Service who provide various debt solutions such as Individual Voluntary Arrangement’s raising finance for debt in business is often a very healthy way of moving forward, in order for growth and development, whereas in our personal financial situations if we’re attempting to raise finance to enter into debt it can often be because we’ve overstretched ourselves or haven’t the monetary needs to live the life we set out to.

In business however, you may be looking to raise capital to enter into an opportunity that requires funds you haven’t accrued yet, or for equipment that we may help expand and diversify your product or service. Yes, it can also be to provide a stop-gap when cash flow has become an obstacle; to pay wages or suppliers, or to cover charges and other fiscal commitments, but when approaching methods to accrue fresh capital there are many reasons lenders will see credit as a positive entity for both parties, a means to make money on both sides which will safeguard their investment in you.

There are two standard terms of debt finance and several methods that outline ways to respond to them. Short-term and long-term plans depict an outline of what the capital should be used for and the time it should take to clear the debt and also the means and methods of accruing the finance to repay the amount.

Short-term debt finance

A short-term finance option should be for temporary fixes to cash flow problems. Elements that apply in this area could well be finding capital to pay for equipment, for stock or supplies needed to provide or produce your product or service, or perhaps simply to acquire the day-to-day items your business depends on while waiting for the payment of outstanding work. Perhaps you need to find additional capital to fund marketing or advertising? Without which you may have insufficient clients to sell to, and without them there are no sales, no profit and no business model. You could even utilise short-term finance options to pay for sales staff as an alternative to marketing and advertising if that’s a proven method shown to create greater results in your industry or field of expertise.

Credit Cards

The simplest form of short-term loan is credit. You can apply for a credit card to help you over a simple hurdle in a healthy manner if you adhere to a repayment schedule your business can safely manage. A credit card will offer an extendable solution of finance if your repayment plan doesn’t happen as smoothly as initially planned or if in clearing the primary amount another situation arises where a secondary credit requirement becomes necessary.

Short-term business loans

Short-term loans will generally have a higher rate of interest than long-term, and will require some form of collateral to be approved as a low-risk option for the loan amount. Often the loan can remain an open-ended operation so that an option of additional capital is available if required for continual business operation, as long as the repayments are being made regularly and as outlined in your loan arrangement. This option offers advantages to both the lender and borrower by feeding capital into both operations.

Overdrafts

A business overdraft is another simple solution to overcoming short-term needs. An arrangement for access to extended operating capital at a suitable interest rate is standard practice for many business operations.

Long-term finance

Long-term debt solutions are options to fund the on-going performance of your business, to develop growth and expansion, and to sustain the comfortable operation of your organisation while you do.

Deciding on a long-term solution will depend on the amount you need to cover your operational and purchasing costs and how long you estimate it will take to repay. A long-term loan will have lower interest rates and can offer varying options for regular repayments, one off and lump sum repayments or for an early complete repayment.

Unsecured business loans

An unsecured loan requires no collateral but it does require a good credit score. You may have to prove you can raise an amount of capital in a given time to reassure your lender that you are a healthy risk for the loan amount.

Typical interest rates will vary from 6% to 20% with terms of up to and over 6 years. There may be restrictions in how you can utilise the funding which will be covered and outlined through your application process.

Secured business loans

The opposite of the unsecured loan requirements are shown here giving that collateral has to be pledged to show repayment capabilities yet in turn means you may still be approved even if you are carrying a lower personal credit score.

A business with a good long-term record and steady cash flow is the basis for a secured loan approval. Interest rates and loan terms are similar to unsecured loans.

Start up loans

A government-based scheme offering amounts up to £25,000 for new or newly operational small businesses over a term of up to 5 years is available at a standard rate of 6%. Encouraging new businesses to commence operation by offering this means of funding the scheme also offers free mentoring, guides, and unique offers in order to help the applicants achieve their best chances of success.

Equipment loans

An equipment loan is a type of credit specifically outlined for purchasing equipment with a long lifespan of operation. This equipment will be seen to be imperative to the operation of the business and the repayments can be made over a term in consideration with the lifespan of the apparatus.

Equipment loans can be seen as a healthier option to hire purchase or leasing of equipment by offering lower rates of repayment and with the option of owning the resources at the end of term as an investment into the business inventory.

Peer-to-peer business loans

A peer-to-peer loan is often a simple and straightforward alternative to a bank loan. Businesses or individuals with available capital are matched to those seeking such, often over Internet-based platforms, where those looking for a return on their investment can find simple ways to enter into such a scheme. Multiple lenders can be involved in raising the required capital amount that can be anything from a thousand to several million depending on the business and its need.

Peer-to-peer lending is regulated by The Financial Conduct Authority (FCA) and borrowers will need to show a proven track record, present complete financial accounts and to pass various credit checks throughout their assessment.

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