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Funding for business growth: what you need to know

Blog By Duncan Khoury – 29 October 2021

For businesses experiencing rapid growth, this can be an exciting – yet challenging – time. 

With increasing demand and growing revenue, you can see several opportunities ahead. To meet this new demand, you might consider expanding your workforce, automating processes and introducing new products or services. 

But all this change requires investment.

The question then becomes how to best fund business growth to create consistent, sustainable progress. Options range from debt to equity to internal funds, but the best financing option for your business can vary according to your operations and ambitions. 

Debt financing is typically the best choice for businesses that lack the internal funds to fuel growth when the owners want to retain control. And while banks are often the first place that businesses turn to for debt finance, they aren’t always the best fit. 

So, depending on the nature of your business, alternative funding sources might offer more flexible and cost-effective financing – often acting as a supplementary facility to any bank arrangements. 

How business loans work

Debt financing is money that you borrow and then pay back with interest over an agreed period of time. Also known as a business loan, debt financing is designed specifically for business purposes. It typically includes fixed amounts to cover one-off projects or purchases or a line of credit. 

Business loans can vary in terms of rates, repayment terms, loan terms and the type of security required.

When most people think of business loans, they think of borrowing money from their bank. To secure a business loan from a bank, you’ll need to provide evidence that your business is sustainable and can service its debt. 

Banks generally have a low appetite for risk (see below), so they can – and often do – need extensive assurance about the viability of your business. Each bank has its own lending and eligibility criteria, but you’ll usually need to provide:

  • information about your trading history
  • information about your credit history 
  • financial statements, including balance sheets and profit and loss statements. 

Depending on the nature of your business, you may also need to provide additional information such as a business plan, contractual agreements or cash flow projections. 

It’s not surprising that banks are often the first port of call for business lending. As an existing customer of your bank, taking out a loan can seem like a natural extension of your business banking relationship. That’s probably why banks have traditionally been the primary source of funding for businesses.

But for businesses in a growth phase, borrowing from banks can be challenging.

Core challenges with business bank lending

While banks are often the go-to business funding choice, their loans generally come with added complexities, including:

Strict lending criteria

Thanks to operating in a highly regulated environment and being answerable to shareholders, banks tend to have a low appetite for risk. This generally means they take a more conservative approach to lending. 

Complex paperwork

Paperwork goes hand-in-hand with strict lending criteria. Businesses often need to submit evidence from across several areas of their operations, which the bank will then assess as part of the approval process. 

Long lead times

With strict criteria and complex paperwork requirements comes longer lead times. These lead times can occur not just during the application process, but also throughout the life of the facility. Some business bank transfer times can be as long as several days, resulting in delayed payments to suppliers.

High transaction costs

Bank service charges for businesses can be high, and add up over time. If your business has a high volume of transactions and you deal in exporting and/or importing, these fees can impact your profitability.

For businesses looking to grow, these challenges can have serious implications. Strict criteria and complex paperwork requirements can be difficult to meet for businesses on a fast growth trajectory or with very little stock on hand. 

And even if a business meets the bank’s eligibility criteria, long lead times can cause them to miss opportunities, holding them back. Funding is a key ingredient for growth, so it’s critical for businesses to have the financing they need to support growth initiatives.  

Beyond banks: other sources of finance available to a business

If you’re wondering what the best financing options for your business outside of (or in addition to) the big banks might be, consider our list of alternative debt finance options below:

Debtor finance

Debtor finance allows a business to borrow based on one of its biggest assets: its accounts receivable.

A debtor finance facility can help to bridge cash flow gaps by providing access to funds that are owed to your business when you need them. Rather than charging interest on a fixed loan amount, the finance provider instead charges a percentage of the amount owed in exchange for offering fast access to cash.

This can be a good option for businesses that don’t have the physical assets to offer as security to banks. They may have maxed out their property equity or have a business model that doesn’t require holding physical assets, such as eCommerce.  

Trade finance

Trade finance is a type of funding that provides you with a convenient, revolving line of credit. Facilitated by a third party, it means you are able to pay suppliers instantly and enjoy flexible repayment terms. While it’s often used to streamline international trade, it can also help you strengthen relationships with local suppliers who may have short payment terms or require full payment upfront.  

And much like with debtor finance, it doesn’t require businesses to provide physical assets as security. 

Supply chain finance

Supply chain finance is a hybrid form of funding that covers both debtor and trade finance. It provides off-balance-sheet financing that helps to strengthen a company’s balance sheet while improving its cash flow management at the same time. 

A supply chain finance solution links suppliers and buyers in the one process. If you’re a buyer, it enables you to settle a supplier’s invoice immediately and perhaps take advantage of early payment discounts. Then, you can repay the invoice amount at a later date, which can strengthen your supplier relationships without interfering with your ability to take out other loans. 

Flexible business finance alternatives

Most companies need some form of finance to power their business growth. While banks can be a valuable source of funding for some growing businesses, alternative options often help to accelerate their growth.

At Octet, we offer a range of flexible business finance alternatives including:

  • Debtor finance: Get up to 85% of your invoices paid now to boost cash flow, without needing to provide personal asset security. 
  • Trade finance: Increases your purchasing power with a competitive, convenient line of credit – with up to 60 days’ interest free and 120 day repayment terms.
  • Supply Chain Accelerate: Optimises your working capital with an off-balance-sheet source of funding. 

If you’re ready to power your business growth, and receive more flexibility than the banks, get in touch with the team to find out how we can help. 

 

Disclaimer: The following comments are only our views and should not be construed as advice. You should act using your own information and judgment. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgment as at the date of publication and are subject to change without notice.