Bank loans, leasing or hire purchase agreements are in most cases better suited to larger longer-term purchases, such as investment in plant and machinery, computers or transport.
While it is almost always the case that an entrepreneur will benefit from the knowledge, insight and network of advisers who deal day-to-day with banks and other finance providers, businesses themselves should cultivate relationships with banks and other finance providers, who may help meet future financing requirements rather than just the immediate needs.
To obtain a bank loan or overdraft, management must prove to the lender that the business will generate the income and cash to both repay the facility according to the terms of the loan, and service the loan by meeting interest payments. Market conditions and regulatory requirements, such as those that mandate responsible lending to viable businesses, may also impact the ease with which a business can access a loan or overdraft. It is likely that the business will need to provide security for any money borrowed against other personal or business assets.
Increasingly debt funds are offering to lend directly to businesses. This has been more targeted at larger businesses and has arisen in the wake of the financial crisis, as the funds have stepped in where banks have been forced to reduce the size of their lending book because of liquidity rules. The loan will typically be indistinguishable from a bank loan in relation to the terms. Often debt funds will co-lend alongside banks.
Bonds and mini-bonds
Bonds – retail bonds or corporate bonds – are a way for companies to borrow money from investors in return for regular interest payments.
They have a predetermined ‘maturity’ date when the bond is redeemed and investors are repaid their original investment. A lender is tied in until they mature. Bonds can have an advantage over loans in that the business issuing the bond can have more control over the specific terms of the finance.
Traditionally, corporate bonds and retail bonds would be traded on the stock market and really would only be available to larger companies which have a trading history. However, this is changing. Recently online platforms have entered the market, offering a one-stop-shop for raising finance through bonds. These platforms operate in a similar way to peer-to-peer lending platforms but offer the flexibility that bonds do, and generally work with larger amounts of funding (usually £1m upwards).
Mini-bonds are similar but, crucially, they are not traded on a stock market and can only be promoted to certain types of investor. A lender is also tied in until they mature.
Merchant cash advances
Merchant cash advances are unsecured advances of cash, based upon future credit and debit card sales. These are repaid via a pre-agreed percentage of a business’s card transactions. Unlike many other forms of business funding, company or personal assets are not required as security. If the cash advance takes longer to pay off, the originally agreed repayment cost remains the same.