Business Financing

What is Business Financing

Business Financing is an investment that a business takes out for commercial purposes. This can be to make short term payments, invest in marketing or to create new growth opportunities. Pretty much anything that a business might need to spend money on can be considered as part of the finances, and business financing is where a third-party steps in and lends them money. This could be for a stake in the company or for a percent of the value of the loan. 

Debt financing

Debt financing is where a business borrows money from a bank or from a private lender for the purpose of raising capital. Interest is charged on the loan, which is repaid in the future. Debt financing is popular because it does not require equity to be offered to the lender, which means the ownership is not diluted. 

Advantages of Debt financing

One advantage of debt financing is that it allows the business to use a small amount of money they have to the best effect at the right time, to allow for growth.

Disadvantages of Debt financing

There are several potential disadvantages to debt financing, all of which are based on not making the repayments on time or in full. The main disadvantage would be the need to maintain a regular income to repay the debt. Another could be potential bankruptcy if the debt is not repaid. A business’s credit rating might also be adversely affected. 

Equity financing

Equity financing is when a business sells shares to raise capital. This means that the business is selling part ownership in exchange for the ability to either pay a short-term debt or look at funding a long-term opportunity. 

Advantages of Equity financing

The main advantage of equity financing is that there are no repayments since it is not a loan. Another advantage is that credit is not an issue with equity financing like it is with debt financing. 

Disadvantages of Equity financing

The main disadvantage to equity financing is that it requires profit to be shared. Shareholders will expect a dividend on their investment and the business will always be focused on earning that dividend. Sharing control of the company is another potential disadvantage, especially if tension or conflict arises.

Other types of financing

Other types of financing include peer-to-peer lending, crowdfunding, or taking a loan from a company that can tie the repayment amount to the value of sales on a daily basis. 

Advantages of other types of financing

Crowdfunding has the advantage of not requiring repayments or might only require a product be given to the investor rather than money. Peer to peer lending can be less regulatory and have that ‘among friends’ feel. An advantage of taking a loan from a company that ties repayments to sales is that there are no payments where no sales are made, and that repayments will be affordable when sales are low. 

Disadvantages of other types of financing

A disadvantage to other types of financing might be the potential extra stress of owing money to a friend or relative rather than a bank. Crowdfunding could come with terms and conditions that makes it less practical.

4 Alternative Business financing options to consider

1. Business Loan with flexible repayments

A business loan which allows for flexible payments based on the daily value of sales is a good option for businesses that receive repeat payments by clients. Included but not limited in this category would be hair salons, restaurants, pubs, and businesses that take orders online.

Pros:

• Payments are flexible and if the business is not earning well, the repayments will reflect that.
• Daily income reviews allow for a real-time understanding of a business’s ability to repay a loan.

Cons:

• Banking information in a read-only format must be shared with the company so that they can run analytics to determine daily income. 
• The repayment amount will be higher on days where income is higher, so the business is not able to spend the income in full without the loan provider taking out the relevant repayment. 

2. Rolling Credit Facility

A rolling credit facility is basically a loan that the business can continue to top up after all repayments are made. This option allows the business to acquire new funds whenever they are needed. 

Pros:

• You only need to apply for a loan once; after that, simply repay and top-up whenever your business needs to. 
• Your credit will grow, and you will become more creditworthy.

Cons:

• Revolving credit facilities generally have a higher rate of interest than a fixed-term loan.
• There will be additional maintenance fees, and possibly withdrawal fees. There may be specific terms and conditions which might differ from a standard term loan.

3. Term loans 

A term loan allows a business to take out a set amount of money for a specific amount of time. This can be used for anything the business requires, such as covering short term capital issues or funding a growth opportunity.

Pros:

• One pro to having a term loan is that the payment dates and amounts are known in advance.
• The loan can be used for anything the business requires. 

Cons:

• Making set monthly payments might be difficult for businesses with sales flow issues. 
• The loan would end, and a new loan would have to be requested if further funding was desired.

4. Merchant cash advance loans

The merchant cash advance loan offers a business the ability to take out a loan and pay a small amount daily until it is repaid. 

Pros:

• Payments are lower when sales are low and higher when sales are high, giving you greater repayment flexibility.
• The merchant cash advance loan provider is already aware of your high and low sales days, so there is no need to reach out and request a workable plan.

Cons:

• The repayment will be required daily at the rate agreed, this means it cannot be put off and paid with another source or in full. 
• The lender has access to a read-only copy of your business’s bank statements to keep up with the sales.

How to get financing for your business

FAQs

Q: Is it hard to gain short-term business financing for SMEs in Ireland?

A: It can be daunting when your business runs into a shortage of capital. This is especially true for SMEs that lack a network of professional providers such as a business loan partner. Some companies can make applying for a loan overly complicated, while others make it as easy as possible. If you are looking for an easy-to-use rolling credit facility or term loan, please contact us today. 

Q: What can I use my business loan for?

A: The loan can be used for anything as long as it’s related to your business.

Q: What’s the best loan option for me if I’m concerned about making repayments?

A: Most likely, the rolling credit option is the best option for you if your business experiences sales fluctuations that could hinder your ability to make set repayments. With this option the amount you have to repay is calculated on a daily basis, so when sales are high, your repayments will be higher, and when sales are down, the repayments will be lower.