How To Finance Business Growth

How To Finance Business Growth

You can’t grow a business without capital. But capital isn’t unlimited. How can you finance your business growth?

Running a growing business sounds like an absolute breeze until you start facing the inevitable challenges associated with doing so. While your growth may be profitable, it isn’t always cash flow positive in the short term. This can cause major problems for growing SMEs.

To tackle this, we sat down with Gary Hemming, Commercial Lending Director at Commercial Finance Broker ABC Finance, to find out exactly how to manage this situation.

So what should you do if your growing business has stretched cash flow?

According to Gary, “stretched, or even negative cash flow isn’t unusual and doesn’t mean that your business is performing poorly.

“A growing business will inevitably start spending based on its new, increased size before the new, increased turnover starts coming in,” stated Gary of Invoice Finance Brokers, ABC Finance. 

He added, “Increased wages, stock costs, and other people’s expenses can weigh heavily on a small business while waiting for funds to come in. The simplest way to solve this issue is to use finance intelligently during periods of growth.”

What can finance options be used by growing businesses?

According to Gary, the best finance options for small businesses are the following:

Invoice finance

A lesser-known product, invoice finance, can be used by businesses that accept delayed payments based on invoices, usually 30-90 days from the issue of payment.

Invoice finance lenders usually allow you to borrow between 80-90% of the value of the invoice on the same day that it’s issued. The remainder is then released to you when the invoice is settled, minus a small amount of interest.

Invoice finance is popular as your available borrowing will increase or decrease in line with the outstanding value of invoices. This is perfect for a growing company.

Unsecured business loans

Unsecured business loans work in much the same way as unsecured personal loans. A lump sum is borrowed from a lender over an agreed term. Once the funds are released, regular monthly repayments are made until the loan is repaid.

Unsecured business loans are perfect when a business needs a single cash injection and is unlikely to need further funds in the short term.

One of the biggest advantages of a business loan is that it can be arranged very quickly, usually in 1-2 weeks, meaning they’re perfect for when you need funds in a hurry.

The biggest drawback is that with no security to fall back on and no collateral, interest rates are likely to be higher than other forms of business finance.

Finance Business Growth

Asset finance

Asset finance is a product that allows you to borrow against the assets owned by your business, usually machinery, equipment, or vehicles – although anything can be used in theory.

Asset finance lenders often purchase the equipment from you and lease it back over an agreed period. It comes in several forms, all of which work slightly differently and have their own tax implications.

The key thing to consider is that asset finance allows you to leverage your assets and raise funds needed to grow your business.

As security is being offered, you will often benefit from lower interest rates than unsecured business loans.

There is a little more to the application process, however, as your assets will need to be appraised by the lender, often physically, which takes time.

Commercial mortgages

Commercial mortgages, or more accurately, commercial remortgages, allow you to release equity from your business premises.

Commercial mortgages are typically used by businesses to raise finance for a variety of purposes, including the purchase of a new property, the expansion of the business, or the refinancing of an existing mortgage.

Commercial mortgages allow borrowers to take out large sums due to the security offered over the property.

The biggest drawback to consider is the amount of time it takes to get a commercial mortgage. You can expect the application to take at least eight weeks, meaning they’re not suitable when funds are needed in a hurry.