Your small business finance or commercial finance options include:
- Business loans
- Commercial loans
- Lines of credit
- Home equity loans
- Franchise funding
- Venture capital
- How much money does your business need?
A lot of small businesses fail not because they’re offering a poor product but because they run out of cash. How much money do you need for your business? Not just to pay for set-up costs but to cover your living expenses while you get established? Don’t even think about going into business until you’ve done a detailed business plan and cash flow projection. Otherwise you’re planning to fail.
Business finance vs commercial finance?
Both business finance and commercial finance are generally secured by either commercial or residential property. However, business finance is probably more associated with small business or SMEs (Small to Medium Enterprises). Commercial finance tends to relate more to the financing of commercial property.
Business loans are where the finance is for business purposes and the interest cost associated with the loan is tax deductible against the profits of the business. Small business operators provide security by way of residential or commercial property.
A commercial loan is where the finance is for the purchasing of a commercial property, commercial property development or business purchase.
Similar lending requirements apply to both business and commercial loans. Commercial loans are secured either by commercial or residential property. With larger corporate borrowers, lenders can rely purely on the assets of the company as loan security e.g. trade debtors.
Lines of credit
With a line of credit, you’re given a borrowing limit by the lender and you draw down money – up to that limit – as you need it. The advantage of a line of credit is that you only pay interest as you draw down money. The disadvantage is that the rate of interest may be higher.
A line of credit should be “fully fluctuating”. ie It should only be used as a short term financing option rather than for the purchase of major commercial plant or equipment.
Home equity loan
Many people have limited cash reserves but have built up equity in their homes. That is, their homes are worth more than they still owe on their mortgages. You can tap into this equity to help finance your business or investment by taking out a home equity loan.
Start-ups versus existing businesses
If you’re thinking of running your own business, you should be aware that it’s generally easier to get business finance for an existing business rather than a start-up. Lenders tend to view start-up businesses as inherently risky whereas an existing business has a track record they can review. However, there are business finance options for start-ups.
Franchise finance or franchise funding
To meet an emerging need, new business finance products have come onto the market to help people buy franchises. Lenders can be more inclined to provide franchise finance because, while your business might be new, it could be based on a proven formula.
Venture capital (VC) describes where a lender gives you funds in return for a stake in your business. The further your idea is from fruition, the less likely the venture capital or VC firm will be to give you the money, and the more equity they’ll want in return.