There are many ways of funding a business but you have to decide first of all what sort of financing is best for you? Each of these will have a different impact on your business as it grows.
This involves borrowing money, usually in the form of a loan or overdraft. It is the most widely available and frequently considered source of external finance. The bank loan being the most popular, is where an amount is repaid at an agreed rate of interest in a specified time period with the interest rate being either floating or fixed. You will need to demonstrate to the lender an ability to service the repayments in order to guarantee a loan and sometimes security may be required, this means that if you fail pay up on the loan the lender has a right to claim the asset.
The good thing about this type of loan is that because it is secured against an asset it is less risky than other types of loans and you would get better interest rates as well. A disadvantage could be that you would be locked into set payments of what may be a fixed interest rate and this could be a major problem for fast growing companies that require a lot of capital
For this reason, a loan is suited to a tried and tested business model that can offer good prospects of profitability i.e. franchise. A loan is particularly useful if you require longer term finance for a specific purpose or planned expenditure.
An overdraft on the hand is linked to your cash flow and not your capital and would usually need to be repaid on demand. It can be very expensive if you go above your limits. This particular type of debt finance is to help you overcome some of your most financially demanding periods that are usually linked with fluctuating working capital, as with this you can rely on the extra capital when you most need it.
You can also get debt finance through you suppliers via extended credit terms. however, this can only really be achieved if you have a close relationship with your suppliers. If the supplier is familiar with your business on the whole and understands your working strategy, and financial status they may be more willing to extend agreed terms
Another type of debt finance that is becoming increasing popular is leasing or hire purchase, where you borrow assets with the option to buy. This could be a good option to consider as it can provide tax incentives over owning equipment and will not require personal assets as security. You also increase your return on investment in the business as the total amount you invest is reduced.
Factoring or invoice discounting where you borrow against your sales is also becoming a popular way of obtaining debt finance.