Compare Small Business Financing Options

The range of financing options available to small and medium-sized businesses (SMEs) in Australia is better today than it ever has been.

Fintech and sheer innovation mean new offers are coming onto the business funding market all the time, but most are still based on just a few age-old concepts. In order to understand what funding option will be best for your business, it is a good idea to be familiar with these principles and know the pros and cons of each.

Types of Business Funding

Business funding can broadly be split into debt, equity funding and off-balance sheet options such as selling an asset.

Most people are familiar with debt funding: credit cards and mortgages mean even non-business people use debt to their advantage – and sometimes detriment. The dangers are just as stark for businesses.

Equity funding is more common in big business. When a company floats on the stock exchange, it can raise large amounts of cash and it will never have to pay it back: instead, the owners are giving away a stake in the business, forever. Few SMEs will be considering flotation, but there are options for equity funding.

What many businesses fail to consider when they are looking at funding options is the possibility of selling an asset. Of course, you don’t want to lose your vehicle fleet or factory machinery! But there is one asset that often gets overlooked: your accounts receivable.

Pros and Cons of
Business Funding Methods

Business Loans

Debt funding (not to be confused with debtor financing!) for businesses usually means either a secured or an unsecured loan. Both offer a way for a business with a decent credit record to get hold of a significant lump sum of money.

In theory, the business bank loan should also be a simple form of financing, but unfortunately the application process can be fraught and lengthy. Alternative finance providers tend to offer a much quicker service, but at a price. Both banks and alternative lenders also tend to charge a number of fees that push up the cost of their loans to businesses.

The main drawbacks of business loans are the need to meet a regular repayment schedule, which can cause cash flow issues down the line; and the risk of punitive action should you fail to meet your repayment obligations – even defaulting on an unsecured loan will not end well for your business!

Private Equity and Crowd-Sourced Funding

With equity financing, businesses are on a safer footing: arguably, there is no cost whatsoever to the business as an entity, providing management problems do not arise. However, the business owner forgoes all rights to a certain share of profits in perpetuity, so for a successful and growing business equity funding is arguably very expensive.

The traditional sources of equity capital for smaller businesses tended to be ‘business angels’ – wealthy investors who also bring business know-how – and venture capital funds. Both only tend to invest in companies with an ambitious vision for growth.

For smaller firms, and start-ups in particular, the wonders of the internet mean they too can now sell shares in a manner of speaking. The global phenomenon of crowdfunding has been regulated in Australia, and for businesses looking to raise money from the masses by offering a stake, perks or advance sales, now have to use a registered crowd-sourced funding provider or meet stringent criteria themselves.

Cash flow Financing

Businesses which have a healthy set of business buyers on their books (B2B) have a further financing option, which can be very practical and cost effective: cash flow or invoice financing.

We’ve written many pages on the benefits of flexible invoice discounting, as offered by OptiPay, but in short this service works by allowing businesses to access the cash tied up in their sales ledger. By getting invoices paid immediately, instead of 30, 60 or even 90 days after issue, a business can raise a lot of money, and the financier will be paid automatically.

Invoice financing also helps firms to manage their cash flow situation, and with OptiPay, you pay only a single pre-arranged fee for the service. Cash flow financing can be arranged so that there is little or no risk to the business should the invoice go unpaid, making it a low risk as well as cost-effective business funding option.

Get in touch with OptiPay today to find out how to start selling your invoices, and get tomorrow’s cash flow today!