While it is a tough climate for small and medium-sized businesses in the UK at present, entrepreneurs have at least received some solace in the form of increased lending by one of the UK’s biggest pension funds.
More specifically, BAE Systems Pensions announced last week that they were planning to lend cash to SMEs through their online platform ThinCats. This is a move that could completely revolutionize the way in which entrepreneurs fund their ventures in the future, particularly as the economic climate around them becomes increasingly volatile.
We have already seen a number of financing options emerge in the wake of the great recession, creating a combination of traditional and innovative solutions to suit different circumstances. Here are three of the most popular:
For many entrepreneurs, banks financing still represents the first port of call when looking to fund their ventures. One of the main reasons for this is the guidance that banks are able to give small businesses, while this type of entity also boasts genuine structure and is bound by strict regulatory measures.
As a result, banks are ideally placed to recommend the best products to suit your needs, while they can also offer unsecured and secured loans depending on your own unique circumstances.
Forging an agreement with banks can also be the foundation for a mutually beneficial partnership going forward, as overdrafts can be arranged to help manage the day-to-day needs of the business and optimize cash flows.
2. Invoice Financing
One of the most effective funding methods on the market is invoice financing. With one of the most popular forms of this product being invoice discounting, which is available through service providers such as Touch Financial. Through this solution, your company’s accounts receivable is used as collateral for a cash advance – usually up to around 95% of the invoice value.
This debt is settled once clients pay the value of their invoice, bringing your venture back onto an even keel within a relatively short period of time. This serves as an excellent way to optimize your business’ cash flow, while enabling the venture to grow without encumbering long-term debt.
3. Borrow from Friends and Family Members
The option of borrowing from friends and family members, which remains a universally popular financing method, offers a number of obvious benefits. One of the main advantages is the fact that you won’t be required to pay any interest on the amount borrowed, while in most instances you won’t be asked to sacrifice any equity within the business either.
In fact, this type of agreement is usually defined as a straight cash loan, with the repayment terms variable depending on your relationship with the lender and the amount of cash borrowed.
There are significant pitfalls with this type of borrowing, however, not least because it can place a significant strain on personal relationships when repayments are missed. Similarly, friends and family members may not be able to offer much support or guidance outside of the cash loan, so it may not be the ideal choice for novice entrepreneurs.