I’m regularly asked by our clients, how can I access capital for my business? So in this short video, we’re going to look at the various options available to you as a business owner to bring capital into your business.
Firstly, personal capital. As the business owner you could lend money to your business borrowed from your personal wealth. If you have equity in your home and your mortgage allows for it, then you could borrow money out of your house and lend that money to your business at mortgage rates. Many business owners do this, and it is the cheapest form of capital as your borrowing at the mortgage rate, however, what you’re doing is obviously putting your personal wealth at risk inside your business, so it’s not ideal.
Secondly, you could sell equity to third party or external shareholders, depending on where your business is in its life cycle, that may or may not be good value, depending on what values and skill sets your shareholders could bring to you other than just capital. It also means you’re obviously diluting your equity in your own business, which again may not be desirable for you as a business owner.
Number three, traditional debt, such as a bank overdraft or bank bill. If you’re an SME business without significant security to offer the banks such as real estate, don’t bother. Banks will not lend on risk.
Four, credit cards. A short term fix with a long term pain unless you can afford to repay the minimum monthly repayments or, in fact, the full repayments each month.
Five, online lenders. The proliferation of online lenders into the Australian market place over the last decade has disrupted the traditional banking model and provides a real alternative for many businesses with fast turnaround and typically does not require property security. But as with all loans the money you borrowed today, you must start repaying on P&I repayment schedule next week or next month, so make sure that your business can afford to make the monthly minimum repayments.
Six, asset finance. If your business owns equipment or other assets, you may be able to unlock cash against those assets and use that money within your business. But like any other sort of loan it will require regular repayments so make sure your business could afford those repayments.
Seven, invoice finance. whilst relatively unknown in Australia, invoice finance is the number one form of business finance in the United States, United Kingdom and Europe as it allows a business owner unlock the cash that’s tied up in their unpaid receivables or their unpaid invoices. And there are no repayments against that cash, because the financier gets repaid when the debtor makes payment on the agreed credit terms. This allows your business to continue to offer credit terms to your customers but access up to 90% of the sale value of that invoice immediately upon making that sale and for this reason, invoice finance is a very powerful form of business funding.