As a business owner or director, there will be times when you need to access finance for your business.
You might need finance to grow, to buy stock or to see you through difficult times. But which method of business finance is right for your organisation? In this article, we explore some of the general challenges facing businesses, the traditional methods of business finance and some alternative financing solutions.
Why you need business finance
According to the Australian Government’s business.gov.au website, fluctuations in cash flow can have a serious effect on a business’s viability. As a result, one of the most common reasons a business seeks financial assistance is due to cash flow. But there are many other reasons why a business owner might seek funding. You might need business financing:
- to help establish a new business
- to purchase or lease property such as a factory or store
- to expand a business or begin engaging in international trade
- to purchase stock
- for investment in vehicles, machinery or other tools and equipment
- for research and development
- during times of difficulty to help the business survive
New challenges in business finance
The global pandemic and its aftermath wreaked havoc on the world’s businesses, but when we finally emerged from COVID, business leaders and owners faced new challenges.
The smallest SMEs to the largest multinational companies felt the impact of global supply chain issues, increased costs, skilled worker shortages and ongoing global uncertainty. Record levels of inflation and rising interest rates put pressure on households, consumers and business owners alike.
According to a recent KMPG report, business leaders have also been left with concerns about staff acquisition and retention, cybersecurity and digital transformation, the disruption of remote workplaces as well as new technologies. If businesses are to survive in the future, they simply have to innovate.
There is no doubt that the way we do business has changed, and that includes finding new ways to access business finance. The good news is there are a variety of methods available to finance your business. Options range from the traditional, like loans and overdrafts, to the more flexible, like Debtor Finance and Trade Finance.
You’re probably familiar with the traditional funding options, but the more innovative types may actually suit your business better.
Let’s examine the various finance options available.
Traditional methods of financing a business
The Reserve Bank of Australia reports that since the second half of 2021, small and medium businesses have experienced relatively strong growth conditions. As a result, demand is high for business finance. But though demand is strong, businesses face many hurdles, including rising interest rates. This makes accessing traditional bank funding difficult.
So, how do you finance a business? Many business owners still default to familiar, conventional options when they need financing, and there are three basic ways to go about it. It can be achieved by:
- using internal funds
- organising debt finance
- arranging equity finance
Each of these options has benefits and drawbacks. Let’s take a look at each.
Business Financing Method #1 — Internal Funds
As a business owner, you might prefer to fund your expenses and growth through internal funds, such as the cash and savings you already have sitting in your business. These internal funds might come from profits you’ve already enjoyed or by selling assets the business no longer needs. The main advantage of using internal business funds is that you don’t have to take on debt or repay any money to a third party.
However, internal funding or internal financing uses up your company’s available cash or assets, 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 that require readily available funds.
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, lines of credit or loans.
On the plus side, this generally allows you to keep control of your business and profits, because no other parties have any ongoing shared ownership over your business. Plus, the interest paid is often tax-deductible.
The main disadvantage, of course, is that you need to repay the money you borrow — usually with interest. And in the days of rising interest rates, that’s of real concern. The RBA has recently indicated that not only will rates not fall in the near future, they will probably continue to rise.
So, while debt finance can be a good short/mid-term fix, it can also lead to more problems in the future. Many businesses also find it challenging to get debt finance without offering personal asset security, particularly if they’re just starting out or don’t have sufficient equity. But for an established business that is looking for funding to grow, debt finance is often a solid option.
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 both willing to invest and who you want to share future ownership with.
Alternative, flexible business capital solutions from Octet
The pressures and challenges on businesses are changing, but so too are business owners and leaders. According to the report Where Opportunity Lies: Australia’s new small business boom, created by Xero in partnership with Accenture, a new generation of business owners is emerging.
The report shows that of the latest wave of entrepreneurs, 45% are aged under 35. Of those who started a small business recently, 37% were born overseas. Meanwhile, 36% of small business owners are women. The report also reveals that over the next decade, 3.5 million new small businesses are expected to be registered.
Without a solid credit history, this new wave of business owners might find traditional funding difficult to access and will be looking at non-traditional means to launch and grow their businesses.
Alternative, flexible business capital solutions are almost certainly the way of the future.
At Octet, we believe that businesses should ideally be able to fund themselves. Business owners and managers who can think laterally about funding 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 working capital solutions:
The right one for you depends on the size of your business and your unique needs.
Business Financing Method #4 — Debtor Finance
Debtor Finance uses the biggest ongoing asset most businesses will have: their accounts receivables. Briefly, this solution lets you convert up to 85% of your unpaid invoices into immediately available funding within 24 hours. This means you can have the funds straight away, without waiting the 30, 60 or 90 days it might normally take your customers to pay you. Just imagine how much that would improve your cash flow cycle!
Better yet, we offer this without requesting you use your property as security, which many banks require. Using the Director’s personal assets 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 Australian businesses across a wide range of industries, from newer companies to well-established ones. Ideally, you’ll have an annual turnover of at least $1 million, and at least two years of business operation.
Business Financing Method #5 — Trade Finance
Trade Finance gives you a revolving line of credit to pay your suppliers both locally and in more than 72 countries. Again, we don’t need you to provide personal asset security. Instead, you’re generally securing funding against the strength of your balance sheet, with just a company and director guarantee.
With up to 60 days interest free and 120-day repayment terms, our Trade Finance facility is flexible too. You can use it either as your primary funding source or to supplement your current bank or other financing arrangements. So if your bank can’t offer all the funding your business needs, or you want to diversify streams, we’re happy to help.
To be eligible, your business ideally needs an annual turnover of at least $3 million to $5 million and to have shown a profit for the last two 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, which you could use to invest in supply chain innovation or other business growth strategies. The supplier gets paid 100% of their invoice upfront while the buyer has 30, 60 or 90 days to repay us.
Supply Chain Accelerate is completely unsecured, with no director or company guarantees required. And because it’s an off-balance-sheet source of funding, it doesn’t interfere with you taking out other business 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 generally access the credit rating of the bigger company to get paid earlier. Meanwhile, as a buyer, you can take advantage of potential early payment discounts to pay upfront and free up cash flow.
Supply Chain Accelerate is available to larger, profitable businesses with a substantial annual turnover.
Power your business with Octet’s supply chain finance options
Every business, from the smallest enterprise to the largest company, will need access to financing at some stage in their lifecycle. Having reliable, accessible business finance is a must, particularly during times of uncertainty.
The best funding method for your business will depend on a range of factors. At Octet, we help you find the business financing solution that’s right for you. We not only power your business growth, but we also empower you as a business owner or executive with better control over your supply chain.
Our team of supply chain finance specialists have helped Australian business owners and their local and global trading partners access the funding required to succeed. And we’re ready to help you better understand your business finance options.
Ready to take the next step with your business? Let’s take it together… Talk to us today about how to finance your business.
Disclaimer: The following comments are only our views and should not be construed as advice. You should act using your own information and judgement. 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 judgement as at the date of publication and are subject to change without notice.