Funding a business is always a challenge, whether you want to maintain short-term cash flow or expand and grow. But which method of business financing is right for your fast growing business?
In the ABS 2016-17 Business Characteristics Survey, 41% of the businesses who sought finance did so to increase their cash flow. A further 30% beyond that needed funding to replace equipment or machinery. And the most common block to developing or introducing new or improved offerings was not being able to access additional funds.
The good news is that there are a variety of methods available to finance your business. Options range from the traditional, like loans and overdrafts, to the flexible, like Debtor Finance and Trade Finance.
You’re probably familiar with the traditional funding options, but the more innovative types may suit some businesses better and be the answer you’re looking for.
Let’s examine the various finance options available.
Traditional methods of financing a business
Many businesses still default to familiar, conventional options when they need financing. There are three conventional ways to fund a business:
- using internal funds
- organising debt finance
- arranging equity finance.
Each of these options has benefits and drawbacks.
Business Financing Method #1 – Internal funds
Businesses generally prefer to fund their expenses and growth through their internal funds, i.e. the cash and savings they already have sitting in their business. The main advantage of this is that you don’t have to repay any money or take on debt.
However, internal funding uses up your company’s available cash, which may cause cash flow problems later on when it’s time to pay expenses. It may also stifle your business’s growth by keeping you from taking advantage of opportunities.
Business Financing Method #2 – Debt finance
Financing your business through debt involves borrowing money from a lender, such as a bank or other financial institution. It most often takes the form of credit cards, overdrafts or loans. On the plus side, this allows you to keep control of your business and profits, since no other parties have any ongoing shared ownership over your business. Plus, the interest is often tax-deductible.
The main disadvantage, of course, is that you need to repay the money you borrow – usually with interest. So while debt finance can be a good short-term fix, it can also lead to more problems in the future. Many businesses also find it challenging to get debt finance without security, particularly if they’re just starting out or don’t have sufficient equity.
Business Financing Method #3 – Equity finance
The third popular business capital solution is equity finance, where an investor provides funding in exchange for owning a piece of your business. Typical examples of investors include venture capitalists (professionals who invest in existing companies) and angel investors (individuals who invest in start-ups).
This can be less risky than debt financing, as the investment isn’t a debt you need to repay.
The downside is that you lose control and ownership of part of your business. It can also be hard to find the right investors – people who are willing to invest, and who you want to share future ownership with.
Alternative, flexible business capital solutions from Octet
Alternative, flexible business capital solutions are the way of the future. As the average age of business owners decreases, traditional funding may become less viable. Younger owners are less likely to own property, which makes giving banks the often personal security they need for funding an increasingly bigger issue.
At Octet, we believe that businesses should ideally be able to fund themselves. Business owners and managers who can think laterally – about funding and everything else – are the ones in the best position to grow.
That’s why ‘funding your own business’ is at the heart of all our financing options. We offer three alternative business capital solutions:
The right one for you depends on the size of your business and your needs.
Business Financing Method #4 – Debtor Finance
Debtor Finance uses the biggest asset any business can have: its accounts receivables. Briefly, this solution lets you convert up to 85% of your unpaid invoices into cash within 24 hours. This means you can have the funds straight away without waiting the 30, 60 or even 90 days it would normally take your debtors to pay you. Just imagine how much that would improve your cash flow.
Better yet, we offer this without demanding you use your property as security, which many banks require. Now, using your property as security isn’t an issue when the property market is going well, assuming you own property. But if you’ve maxed out your property equity – or you don’t own any – you do need another option.
Our Debtor Finance solution is available to businesses from new companies to well-established ones. Ideally, you’ll need a turnover of at least AUD 1 million, and 1-2 years of business operation.
Business Financing Method #5 – Trade Finance
Alternatively, Trade Finance gives you a revolving line of credit to pay your suppliers in over 65 countries. Again, we don’t need you to provide security from your real estate or personal assets. Secure your funding with just a company and director guarantee.
Our Trade Finance facility is flexible too. You can either use it as your primary funding source, or use it to supplement your current financing arrangement/s. So if your bank can’t offer all the funding you need, or you want to diversify streams, we’re happy to help.
To be eligible, your business ideally needs a turnover of at least AUD 2-3 million, and to have shown a profit for the last 2-3 financial reporting periods.
Business Financing Method #6 – Supply Chain Accelerate
Our Supply Chain Accelerate facility is like a hybrid of Trade Finance and Debtor Finance. It links suppliers and buyers in one process to free up working capital for your business. The supplier gets paid 100% of their invoice upfront, while the buyer has up to 120 days to pay it to us.
Supply Chain Accelerate is completely unsecured, with no director or company guarantees required. And since it’s off the balance sheet, it doesn’t interfere with you taking out other loans.
If you’re a supplier, this facility is hugely beneficial when you deal with larger companies that have an extended payment cycle. It means you can use the credit of the bigger company to get paid earlier. Meanwhile, as a buyer, you can take advantage of early payment discounts to pay upfront and free up cash flow.
Supply Chain Accelerate is available to profitable businesses with a substantial turnover.
Power your growing business with Octet’s finance options
Most companies will need financing at some stage in their life. The best funding method for your business will depend on factors like its size, its assets, and the amount you need to inject.
At Octet, we want to power your business growth.