How Should I Fund My Business?

The big question - It's one of those questions every single start up, SME, or entrepreneur will ask themselves at one time (or many times) during their business life cycle. If you're here, perhaps you're asking yourself this exact question?

When starting a new business or expanding, as they say, ‘Cash is King’. Cash flow plays a crucial role in the success of any business as without sufficient cash your business may struggle to meet the demands of everyday overheads. There are a number of 'non-debt' ways to fund your business such as angel investment, government grants such as CSF, HPSU and LEO funding, crowd funding like Indiegogo and Kickstarter, and investment enterprise programs such as the NDRC. Not to mention boot strapping, family/friends and personal investment.

With all of that said...

For this article we’re going to take a look at the various forms of debt-financing. Like most things, debt financing comes with it its pro and cons. Choosing the appropriate form of debt for your start up or expansion will help to ensure you have the appropriate resources needed to build a successful business. There are other forms of financing such as crowd funding, angel investor, venture capital and others, but we'll save those for another article.

1. Overdraft

An overdraft can be applied to your personal or business current account. This will allow your account to go into arrears to an amount agreed with your bank. This may be ideal if you need an initial level of financial flexibility on your account while you get things moving. This may also be useful where money coming into your account is delayed from time to time and you need to maintain cash flow. If you are just starting your business, you are unlikely to be eligible for a business banking overdraft but may still be eligible for a personal overdraft that you can use to start your business. Overdraft interest rates can be as high as 11% - 15% and so while this type of credit may be relatively easy to secure, it may not be your best approach for long term debt.

2. Personal Loan

If you are just starting out or your business is not yet producing enough revenue or profit to qualify for a business loan, you may decide to apply for a personal loan to invest in your business. A personal loan will require a credit check and will approved based upon your personal ability to repay the loan. Personal loans are usually offered with 3 – 5 year terms with amounts of between €2,500 - €25,000. Some lenders will request that you state the specifics of the loan, i.e. Car Repayment, Home Improvement, Family Holiday and so on, and so this is something to bare-in-mind if you choose to use a personal loan as credit for your business start-up or expansion. With personal loans you will be required to pay a monthly fee plus interest to clear your loan over the agreed time frame. As this is a personal loan, the success of your business is irrelevant in terms of the loan agreement and is owed to the lender by you personally.

3. Credit Card

Credit cards can be a good approach to consider when getting your business started. But they come with their drawbacks. When managed correctly credit cards can be one of the cheapest forms of credit. When managed badly however, credit card debt and interest can compile and become a very challenging and often expensive problem.

Unlike a fixed term loan, you can secure a credit card and avail of the credit only when you need it. Clearing the credit owed on the card each month will avoid high interest of long-term debt on credit cards while giving you the financial flexibility you need when you need it. Credit cards are relatively easy to qualify for if you have a good or average credit rating. Once you clear your credit card debt within the set time frame you will not incur interest on the borrowings.

4. Business Loan

In most cases securing a business loan is most likely if you are already trading and turning profits. Many banks will require 3 years trading and accounts in order to accept a business loan application. If however you are running a successful business and your application is approved, in most cases you will benefit from some of the lowest credit interest rates available. With that in mind, if you’re expanding your business and require working capital, stock, new hires, or equipment, a business expansion loan with your business bank may be a good choice for credit.

When applying for a business loan with your bank you will be required to have a strong credit rating and you may also be required to provide collateral. There can be quite a lot of paperwork and applications can be time consuming. But, if you’re running a healthy business with a proven track record securing a business loan with your bank could be the perfect choice.

5. Credit Union Loan

Credits Unions can offer short and long-term business loans to SME’s in Ireland. As part of the loan application process Credit Unions have partnered with local enterprise boards (LEO) to provide mentoring and business guidance to support the application. This can be a great support to early stage businesses or business owners who require support with business management and financial projections as they expand their business.

Credit Unions are a competitive option in the business loan market place with 6.6% APR on loans up to €50,000 and terms of up to 5 years. Applicants must be a member of their credit union in order to apply for a business loan.

6. Hire Purchase

Depending on your business requirements and resources, hire purchase may be a suitable option to acquire items such as equipment, furniture, transport or other expensive assets. It may make more financial sense to use hire purchase on a piece of equipment rather than purchase the item outright. Hire purchase essentially allows you to hire an item over time until such time as it is paid for. Once the last installment of the loan is paid for, the item is then owned by you or your company.

7. Credit Sale Agreement

Similar to a hire purchase agreement your item will be purchased and paid for in installments, and so does not require a large sum upfront. However, in this case your company will own the item once the transaction is completed. The APR on a credit sale agreement can be quite high and so it is important to weigh up your pros and cons of cash flow vs cost over the course of the year to make an informed decision.

Conclusion

There are many forms of credit and finance that will be suitable for your business in varying situations and circumstances. It is important to consider all of the options when thinking about credit and loan choices for your business. Armed with the right knowledge and understanding of the pros and cons of each, you can make an informed decision when funding your start up or taking your SME to the next level. So like all great business decisions, do the research, and choose an option that gives you the flexibility and commitment you need.

Oh and don't forget to pack your shorts and sun cream for your big success - you'll be living in the Bahamas in no time!