When you’re looking at options to raise capital in order to grow your small business, you can either borrow money or raise money through providing equity. Borrowing money has generally a negative stigma attached to it, perhaps partly due to the fact that banks have made it so hard for small businesses to access loans. In fact, according to the Australian Bureau of Statistics, small business loan applications are rejected by banks at roughly twice the rate of medium-sized businesses.
Alternative lenders, including Spotcap, are helping to smash the stigma attached to borrowing finance to grow small business through making it an easy and painless process. We also want to highlight the benefits of borrowing money to small business, apart from the obvious benefit of freeing up your cash flow.
- Expense deduction
When you take out a business loan, the interest you pay on that loan is a tax deductible expense. This includes interest paid on loans and overdrafts. With the corporate tax rate at 28.5 per cent, that deduction is quite enticing.
- Build credit for the future
For any small business that wants to grow, you need to think big. If you’re wanting to borrow bigger amounts in the future, it’s worth thinking about smaller, short-term loans in order to build your business credit.
Small businesses which haven’t been operating for long can sometimes find qualifying for larger loans difficult because the business and the business owner don’t have a strong credit history to report. Taking out a smaller loan and making regular on-time payments will build your business’s credit for the future.
- Maintaining ownership and retaining profits
A business loan, as opposed to raising money through providing equity, means the money stays in your business and you don’t have to share profits with shareholders.
How to access the finance
It can be difficult for banks to justify the cost of processing smaller credit applications, and so small businesses are commonly turned away. Banks typically demand 5 years’ worth of business data plus another few years of business forecasts before they will provide a loan.
Alternative lenders, on the other hand, make it much easier and it’s a faster process. To help you work out which alternative lending option is right for your business, here’s a summary of the key ones.
Online business lenders
Alternative lenders are innovating the business lending game by paying particular attention to speed and simplicity. More often than not, alternative loan providers offer online and mobile applications which can be completed in less than half an hour (with Spotcap you could be done within minutes) compared to the average of around 25 hours spent completing paperwork to apply for credit from a bank. So you can see why the industry is taking off.
Many online lenders are unsecured so you don’t have to put up any assets. The process is hassle-free and as long as you’ve been operating for at least a year with annual revenue of $100k, you have high chances of qualifying.
Asset-based lending / invoice financing
Asset-based lending is finance secured against your assets – your house, your equipment, stocks or your invoices. Invoice financing is the most common type of asset-based lending. It enables businesses to sell their invoices or receivables at a discount. Invoice finance is short-term financing used to improve the working capital in the business.
Typically a business uploads the invoices it wishes to raise finance against and a pool of investors bid to advance funds against the invoice, with the highest bid ensuring a competitive rate. The business typically receives funds within 24 hours. On completion of the transaction, your customer will pay the invoice directly to the invoice trading platform such as Timelio, who will then distribute the funds to the investors and return any residual to you.
Peer-to-Peer (P2P) lenders (sometimes known as marketplace lenders) connect investors who want a better rate on their money directly with creditworthy businesses who want a simple, competitive loan. By cutting out traditional middlemen and using clever technology to remove costs and inefficacies of traditional lenders, peer-to-peer lenders can give growing businesses a better deal on finance.
P2P lending is people powered lending – the process of matching lenders with borrowers. Lenders on retail platforms such as RateSetter are typically everyday Australian investors, but lenders may also be wholesale investors or institutions. Borrowers are generally SMEs and consumers.
Crowdfunding allows businesses to secure finance quickly and also provides a platform for testing ideas to find out if people want the product and or service you’re offering. Equity crowdfunding through Equitise is a low-cost way to raise capital from a large pool of potential investors. It can also provide a platform to engage with a network of investors, advocates, advisors and marketers for your brand.
An angel investor, also known as a private investor or seed investor, is an affluent individual who provides capital for a business startup in exchange for equity. Angel investors are often retired entrepreneurs or executives who are investing in startups.
The value of working with angel investors extends beyond financing: they can also provide management advice and important contacts. This value works both ways as the investor may also find value in keeping abreast of current developments and technology through working with the startups. Small businesses mainly meet angel investors through referrals from the investors’ trusted contacts or at meetings organised by such groups where companies pitch directly to investors, much like they do on the television series Shark Tank.
Venture Capital Funding
Venture capital (VC) is a form of financing that is provided by firms or funds to startups that have demonstrated traction or high growth, or are deemed to have high growth potential. VC firms or funds invest in startup companies in exchange for equity. They take on the risk of financing startups in the hopes that some of the businesses they support will become successful.
VCs such as Reinventure are often investing in technology startups, or the technology industry where the business model is based on innovative proprietary technology. VC financing is ideal for early-stage companies with limited operating history, that are too small to raise traditional debt capital. In exchange for the high risk that VCs take on, they usually seek influence in business and a proportion of the business ownership.
As you can see, there are a number of benefits to borrowing which could see your business grow, enabling you to make the most of the lucrative market opportunities.
To find out how we can help your business do just that, contact us today.
Originally published February 23 2017 , updated April 27 2017