As the recent economic climate has made it difficult for some small businesses to live within their means, they tend to look for business finance options available to address their cash flow problems and financial controls. But what can be struggling SMEs do to resolve such a dilemma?

business finance solutions

“Almost all SMEs experience the slumps of the trade cycle causing them to go through periodic refinancing activities” Emily Grant, a writer at essay writing company, says. This is a stage which could be avoided if the appropriate business strategies are put in place and a superb business plan strictly followed.

SMEs that undergo a significantly low return from investments, delays in supplier’s contracts or even creditor defaults, are put under pressure and cause the directors to consider the various business funding options available. Should they raise finance against existing assets? Seek external funding?

This guide explores the main types of finance available labelling out some of the pros and cons to each source and highlights what investors and lenders look for in a business before they lend it money. The dynamic nature of the market makes it difficult to provide an exhaustive list of the financial products available.

Bank Overdrafts

Banks can offer additional funding over your business’ current account balance which could help solve some insolvency matters. It is popular among SMEs because of its flexibility in covering day-to-day business requirements. This facility is easy if the crisis can be proven to be short-lived. It may require information demonstrating the credibility of your business-banks don’t like unreliable customers. In cases of timely payments for the facility, it may open your doors to other future financial services from the bank.

The bank must see some proof of serviceability and hold some security which prompts advanced talks with you. The temptation is to sometimes think the money belongs to you which is not the case. It may be a costly form of finance if your business has credibility complications. Remember, that this form of business funding is repayable on demand.

Bank Loans

Banks could offer longer term funding for businesses looking to purchase assets or meet other long-term capital needs. This conventional form of commercial finance is safe and allows you negotiate repayment conditions and interest rates. You could have some peace of mind as you know how much you have to pay back and when to pay back.

Without an above average credit score, accessing a bank loan might be impossible. Bear in mind no bank gives out huge monies for free. You could get away with this if you present substantial collateral assets or some personal guarantee to cover for the risks involved. Financial experts would always recommend this form of business loans to businesses with excellent investment ideas.

Business Grants

If you are looking for an excuse to have a night out with all your colleagues, then getting a grant should be your primary objective. They come in several shapes and sizes, from Westminster, the Scottish Parliament, the Welsh Assembly and local authorities. The internet is a great source of information and specialist consultants are available to advise you on which grants to apply for.

Most grant providers are looking for two things:

  • Business growth– Providers need assurance that the grant will generate additional business revenues and open the doors for business expansion.
  • Viability of your business – Providers want to be sure that the subsequent economic activities generated by the grant could be funded by the business’ means.

When considering making an application, bear in mind that:

  • Grants can often time-consuming and complex.
  • It can be expensive to pay professional fees to help you meet grant requirements.
  • Even if you qualify for a grant, there could be a lengthy delay before you receive any money, potentially leaving the project in limbo.

Equity investment

Selling ownership of the business through company shares to workers, friends, relatives, the public or professional business angels is another way of raising extra capital. Ownership rights of the investors depend on the proportion of shares sold and agreement between shareholders.

Typical businesses require that the business’ management own a substantial equity stake which reassures potential investors of their personal interest. Private investors such as family and friends could act as a lender of last resort and better negotiable deals could be agreed upon. If family and friends lend you money, make a formal agreement on paper so that everyone knows where they stand.

Equity finance could be more demanding than you expect and it could be a full-time job for you trying to influence potential investors into sinking funds into your struggling business. Also, choosing the appropriate investor and getting the adequate funds when you need them could be a major hindrance. Venture capitalists for example typically look for businesses with a solid business plan with at least three years’ trading history and turnover of at least £1million which might not be characteristic of struggling SMEs.

Asset Finance

According to the Finance Leasing Association (FLA), Asset Finance is the third most common source of finance for businesses, after bank overdrafts and loans. Assets generally are good for a business not just for its current ratio but because it could be used as security for traditional business finance solutions.

The assets of struggling SMEs not currently in use could be leased out with the lessee paying for the assets on agreed terms. Hire purchase could also be an option whereby an initial deposit for the asset(s) is made. This could fund daily business activities or cover payrolls. Fixed assets could attract good rates of interest. It is often a quick method and can be accessed through commercial finance brokers or other contacts in the industry.

This method is often used by struggling SMEs to service the debts incurred by the business in the short-term. However, if the crisis takes longer than expected, SMEs could switch to other business funding alternatives.

Factoring

Factoring releases cash to bolster your cash flow using your outstanding invoices. Simply put, it transforms your outstanding debt into immediate cash of up to 90% of the invoice value. The remaining balance is paid once your debt has been settled minus any charges. This is suitable for struggling businesses because their top priority would be avoiding more debt whereas factoring creates additional working capital to let your business operate.

If your debtor control is poor, this facility is ideal because credit control is taken off your hands by the factor company. It is an extremely flexible form of finance – the facility can rise and fall as your needs dictate. What might hinder struggling businesses from considering this form of finance are the costs: service fee- typically between 0.5-3% of the money borrowed from the lender and the discount rate- percentage that the customer is required to pay when they draw down cash from the lender. Factoring is often perceived as expensive but provides you the commodity you need – money.

Unlike other traditional forms of lending such as those listed above, factoring could be the right solution for financing your struggling business. The facility grows with your business and makes money out of your debt. Credit protection is included in the facility whereby your struggling business is protected from bad debt defaults.

About the author: Alissa Zucker is a web designer and copywriter, working for the professional writing company Mcessay.com. She is interested in reading classic and psychological books which give her inspiration.