Small Business Financing
products available in today's marketplace

When you are looking for small business financing, it is not necessary to know what kinds of financial products you are looking for. After all, what you are seeking is a solution to a particular problem:- the need for cash.

If you consult a suitable professional such as a good bank manager (and they’re not all good!) or a commercial finance broker, they'll take the time to introduce you to the small business financing options available, and highlight the pluses and minuses of each.

There are many alternatives to small business loans , and using one or more of the alternatives can significantly reduce perceived risk with any lender, and also reduce the reliance of your business on any one source.

Equipment Leasing

A lease involves three parties. You, the supplier and the financier. You enter into an agreement to make regular payments with a small initial deposit to the financier. Upon signing of the agreement and accepting the goods, the financier pays the supplier in full.

Providing the asset has sufficient value (e.g. a vehicle) the asset itself will act as security to underwrite the deal.

The regular equal payments over a fixed period are a great aid to budgeting.

It also means (and this is one of the most important advantages of leasing) that you can have the use of the latest equipment without tying up your capital, enabling it to be used more effectively elsewhere in the business.

Depending upon the type of lease, you have the option at the end to purchase the asset for a nominal sum, or hand it back. This can mean saving a great deal of time and hassle in disposing of or maintaining an asset.

Placing your finance requirements with more than just your bank is a good idea from a risk perspective both for you and the bank. It also may mean that your reduced requirement for finance from the bank can now be accepted.

Equipment leasing has been used to finance: Vehicles, Plant and Machinery, Computers, Office equipment, and more recently software.

Factoring, invoice discounting or accounts receivable financing

If you have customers, from whom you are owed money, then a factoring or accounts receivable financing agreement can release a large percentage of that owed amount in advance of the normal collection time.

These "book debts" act as security for the finance company.

This acceleration effect makes cash available today to meet important payments. An often overlooked advantage is that it can help your business take advantage of early payment discounts.

Some businesses have very difficult cash flow cycles and factoring is essential. (the most obvious example being staff agencies / employee leasing businesses who must pay staff, before they collect money from clients)

The advance you receive is treated as a loan, upon which you pay interest, until the debt is collected.

The amount of the advance also depends upon the type of industry you operate in, the number of customers you have, the amount they owe, and whether you have a confidential invoice discounting agreement.

In traditional factoring, the finance company makes out your invoices, and their name is carried on the invoices. (And for this they make a regular service charge).

Some companies believe this undermines their credibility as a viable business, and would deter potential customers. To counter these issues confidential invoice discounting was invented.

In this situation the client company invoices the customer directly, and may or may not be collected in house.

The costs seen in factoring deter many clients. However when one takes into consideration the fact that the company can take advantage of early payment discounts, reduce the needs for a credit department to raise the invoices and make collections, and save in bad debts because of better credit control and credit insurance, there is no doubt that Factoring is advantageous.

When this is also considered together with the much reduced need for working capital to be tied up in the business, and the environment this creates for sustained growth, factoring is a formidable ally in the small business financing toolbox.

Export finance

Export finance is a variation of the factoring agreement outlined above, but with contractual variations to take into account the greater complexity and risk of international trade.

Again, the book debts are used as security against the sum advanced, and the outstanding amount financed will be greater as international credit periods tend to be longer (but not always!)

Trade finance

Trade finance is a favourite of import and export businesses. A good example of such would be a toy importer who needs to import toys from China in the run up to Christmas

The difficulty of finding the cash, and having it tied up in stock for a considerable period of time is overcome by a Trade Finance agreement.

The trade finance company will advance cash against the value of Finished goods stock, which is then repaid as the goods are sold. In some cases the finance company will also advance cash against purchase orders! (Often in international trade, goods have to be paid for at the point of ordering)

Stocking or Showroom Finance

If you wanted to open a car dealership, then stocking finance may come in useful. The problem of filling the showroom with high value items in order that the customer may view and use them before deciding to buy is an age old problem.

The finance company will advance cash against the value of the vehicles (acting as a short term loan with the vehicle as security) which will then be repaid when the item is sold.

If your business already has existing assets that are fully or even partly paid for then it may be possible to take out an asset based financing arrangement.

Land, Property and Plant and machinery are all good examples of items that can be ‘refinanced’ to release cash into your business.

Before doing this it is a good idea to understand the reasons why it is needed by referring to your business plan and any management information, to avoid treating symptoms rather than causes. Whilst it is perfectly plausible cash is needed in preparation for an expansion programme, it is also possible that it’s a firefighting action.