Businesses, be it in any industry, require capital to operate, and this capital is huge compared to savings needed for a family. These businesses are always in need of cash, and there are times when their cash flows are not in line with what they anticipated for many reasons.
For instance: the Coronavirus pandemic is a case in point where sales of offline businesses have taken a hit, and they have already incurred fixed and variable expenditures.
In such situations, businesses look for financing from external sources as their revenue side is struggling. This blog will introduce some of the business financing types and sources for businesses to borrow.
Fortunately, businesses can approach debt consolidation loans for bad credit with no guarantor from a direct lender in the UK. These are unsecured loans designed specifically for start-ups and companies with substandard credit profile.
This is because established commercial banks do not entertain both these category borrowers due to credit risk involved in lending to these risky borrowers.
These are no guarantor unsecured loans for which you will not have to pledge any asset as collateral against the loan and nor you will have to produce any guarantor to represent you.
Let’s now look at some of the business financing options in the UK, here it goes:
- Business Loans
These are loans for any cash requirement in a business; the lenders sanction a certain amount of money. It comes with an interest and borrowing business would have to repay in monthly or quarterly instalments during the tenor of business loans.
These are predominantly of two types which are secured business loans and unsecured business loans. The former is backed by collateral (car, property, factory, shares) which the borrower has to keep with the lender.
The latter does not include collateral, and thus interest rate on this category is slightly higher. You can get tax benefits if you have taken business loans from a recognized financial institution.
- Invoice Financing
This is a famous financing mode for businesses, mostly in the manufacturing space where credit period is normal. Their customers usually pay them late, and financial institutions can lend these businesses money in exchange for the pending invoices.
These are basically of two types which are invoice factoring and invoice discounting. The former is usually for short-term and is typically for 30 days wherein businesses can get anywhere between 80-90% of their total value of invoices outstanding.
You can raise money when your cash flows are inconsistent due to delay in customer payments. However, banks will be granted invoice financing when your company’s financials are robust with a demonstrated history of operating in that geography.
- Overdraft Facility
Businesses mostly have a current account with a bank against which they get the Overdraft facility (OD) through which they can withdraw more amount than what is available in their current account.
There is an OD limit which is the maximum amount you can borrow from the bank under this OD facility. Banks charge interest rate and OD fees on the borrowed amount over and above their current account balance.
A business might have to pledge something as security if the OD facility is large.
- Start-up Loans
Established commercial banks do not entertain start-ups who usually don’t have a dedicated financial history, and thus they fail to take loans. There are direct lenders offering debt consolidation loans for businesses. The central government of the UK is also sponsoring such start-up loans under several schemes and initiatives.
The government is funding many innovative start-ups, especially in the social sector. Apart from that, industry veterans also get mentoring on how they can scale their start-ups to take it to newer heights.
The repayment terms and conditions are flexible in these loans as they are government-backed.
- Business Credit Card
Like individuals, businesses also have a credit card which is offered by banks as a source of short-term financing. Small and mid-size businesses and even start-ups can use this mode of financing to meet a shortfall in their working capital requirements.
The best part is that businesses will not have to pay any additional interest on the borrowed amount if they repay the same amount in 30-45 days depending on their billing cycle.
These cards come with a limit beyond which the businesses cannot spend, and if there is a delay in repayment, then interest rate charged on them is pretty high.
- Merchant Cash Advance
This is for retail businesses and businesses using a POS (point of sale) machines to accept payments.
The terminal payments provider gives monthly transaction value and data to lenders to lend you based on your cash value of transactions. These transactions give a better picture of your business’s cash flow based on which you become eligible to get a loan of a certain amount.
The repayment tenor and the instalment amount are set based on the monthly turnover and profit. A merchant cash advance is a great financing mode for seasonal businesses and needs money in off seasons to keep their business running.
- Commercial Mortgage
Commercial mortgages are loans taken for businesses backed by a commercial property that could be an office building, factory, warehouse etc.
Commercial mortgage proceeds are used as a mode of refinancing in this type of financing long-term as it has a tenor between 5 to 25 years. The risk in a commercial mortgage is significantly higher when compared to a normal housing loan.
Thus, the interest rate is also higher in the former type of mortgage loan. This is tantamount to a secured business loan wherein the commercial property acts as collateral and is thus kept with the lender.
- Asset Financing
Asset finance is usually for capital intensive businesses wherein companies need to purchase new assets in machinery and manufacturing equipment.
Hire purchase is a type of asset financing wherein the lender purchases the equipment on behalf of the company, and the company has to repay in instalments.
Ownership of the equipment is with the lender until the borrowing company has repaid the entire loan amount. The only downside of this financing option is that ownership of the asset is with the lender until the repayment.
- VC/PE Funding
Start-ups prefer this financing mode wherein venture capital (VC) and private equity (PE) investors infuse millions of pounds if they like the business idea and business model.
The only downside is that equity dilution in ownership might lead to a conflict of interest in business decision-making. At times, these VC/PE investors demand a seat on the board of that start-up they are lending to.
The upside is that you can raise much more money than what any bank will lend you.
