Six options for funding your small business

Business funding can give your small business the boost it needs to thrive (and sometimes survive). But with so many different sources of funding available, it’s easy to feel overwhelmed. So to help you make sense of the options we have outlined some of the most popular funding solutions based on ease of access.

1 . Invoice financing (also known as invoice factoring or accounts receivable financing) is a form of financing based on outstanding invoices. Widely available and easy to understand, it allows suppliers to improve cash flow by receiving advances from a third-party finance provider against unpaid invoices within as little as 48 hours.

What to know: This option is particularly relevant for expanding businesses dealing with new buyers who demand deferred payment terms. The invoice financer uses the invoice as collateral and if the company applies for non-recourse financing they have no exposure if the invoice isn’t paid.

2. Revenue-based financing is a mechanism by which firms receive capital in exchange for a percentage of future revenue. An advance on sales can be especially attractive for businesses with fluctuating revenue streams looking for an alternative to debt or equity-based funding.

What to know: Lending decisions are based on a review of the business’s financial history and projected revenues. Repayments are calculated on a weekly or monthly basis as a fixed percentage of total sales in that period.

3. Crowdfunding enables businesses to collect money from a large number of people via online platforms. It is most often used by start-up companies or growing businesses and the most common formats are peer-to-peer (where the money lent is repaid with interest), equity (where the investors take a stake in the business), and rewards-based, where individuals donate with expectations of receiving a non-financial reward, such as goods or services, at a later stage.

What to know: Fundraisers are usually charged a fee by crowdfunding platforms if the fundraising campaign is successful. Some platforms operate an all-or-nothing funding model, meaning that if the business reaches its target, it gets its money; if it doesn’t, all the contributors get their money back.

4 . Non-bank lending – which is also referred to as direct or private lending – is where investors extend loans directly to businesses. Unlike banks, which rely on customer deposits to fund their lending, non-bank lenders raise funding in the wholesale capital markets.

‍What to know: Non-bank loans can be more flexible in terms of access to funds and more easily available to businesses with a less-than-perfect credit history, but they may attract higher interest rates. Lenders may also demand equity as a part of the funding arrangement.

5. Angel investors are entrepreneurs or people with experience in business who put their money into early-stage small enterprises (possibly as part of a syndicate) in exchange for a share of the business usually ranging from 10% to 25%. 

What to know: In addition to money, angel investors can offer mentoring and support as well as access to professional networks. Because they work closely with the business owner over a long period it is important to choose an investor with a similar view of the future direction of the business.

6. Venture capital firms look to invest in entrepreneurs and start-ups with high growth potential (unlike private equity where the focus is on established businesses). As with angel investors, they contribute expertise as well as funding. This funding is typically used to expand manufacturing and sales operations, enhance product development, and/or hire new staff.

What to know: Investments are usually held for between five and seven years, at which point the business will either be floated, acquired by a multinational corporation, or taken over by another investor such as a private equity firm.

Personal savings or business credit cards are other potential sources of early-stage capital, but the options discussed above offer access to larger funding amounts, which could have a significant impact on your business's growth potential. Curious about how Stenn can help you? Speak to our team to find out how we can help you to realize your business ambitions with our ecosystem of financial solutions – built around your timeline, not ours.