After reading the first part of this business finance and funding series you will know that any finance will not do even when you are desperately keen to grow, buy or start a business. If you choose the wrong type of finance for your business you could severely affect your cashflow or halt your business entirely.
Each funding option has its good and bad points. Ensure you research your options and choose the one that best suits your business and you. Finance and funding options fall into 3 Categories.
Debt – Loans
Bank Term Loans
Alternative lenders term loans
Credit cards or lines of credit
Peer to peer lending
Friends and family
Cashflow lending/Invoice Financing
Equity finance – Investors
Angel investors
Venture Capital
Friends and family
Equity crowd funding
Other
Business grants
Presales
Debt - Loans
Bank term loans
Loan from a bank that you receive in a lump sum and is repaid over a fixed time plus interest. Term loans can be between one and 10 years however can last as long as 30 years. ASB, ANZ, BNZ, Kiwibank, Westpac.
Alternative lenders term loans
These are the same as bank term loans however the loans happen outside the traditional banking systems. These loans will tend to have a higher interest rate than bank loans. UDC, MTF, prospa.
Bank and alternative lender loans are good for larger purchases such as capital items – vehicles, equipment etc.
Credit cards or lines of credit
A set amount of funds that are available to use when needed and can be repaid immediately or over a specified period of time. Some lines of credit will expire after a set time and others provide revolving credit. Lines of credit are good for purchasing inventory and repairing equipment. The interest rates on credit cards and lines of credit can be higher than that of term loans.
Peer to peer lending
A crowd funded Loan which essentially allows you to borrow from strangers. An online platform matches you with people that are willing to lend money, these are usually personal loans however some have expended to business lending. Harmoney, Squirrel, moneyhub, lending crowd.
Cashflow lending or Invoice Financing
Invoice financing allows for an advance on the invoices you have already issued. You would invoice your customers as usual and then sell the invoices to a finance company. The finance company would advance about 80% of the invoice value and the customers pay the finance company. The finance company would then pay you any extra money (the 20%) less fees.
Cashflow finance is similar to invoice financing, whereby you don’t sell the invoices the loan that you will receive is based on the expected cashflow from those invoices. It is a short-term loan that can be repaid as soon as the money from the invoices is received.
BNZ, Prospa, Spinach, Geneva Capital, Lock Finance
Equity Finance
Angel Investors
These are individuals who invest their own money for a share in a business. Often they will also provide mentoring and advice. They usually invest in startup business and help them get off the ground. Some invest for the long-term however most want their money out after and few years which can involve selling the company. New Zealand Investment Network, Angel Association NZ, Enterprise Angels.
Venture Capital
Are professional investment groups that use other people’s money for a share in a business, they usually want a larger share than Angel Investors. They invest at a later stage than Angel Investors usually once the business is ready to scale up. They will be actively involved in the business and may join the company board as they will want a say in the direction that the company is going.
Friends and family
You will see that friends and family fall under two categories Debt-loans and Equity Finance. As they can loan you funds that are repayable over a fixed term or on demand depending on the terms of the loan. It is always best to get a formal agreement drawn up even if it’s family or a good friend lending you money as issues can arise. The second option is for friends and family to buy into the business.
Equity Crowd Funding
This is a way for people, businesses and charities to raise money and allows the public to invest in your business in return for potential profits. The people that invest receive shares in the company and become part owners. There are a few crowdfunding platforms around some provide loans and others provide equity based funding. Pledgeme, Snowball effect, moneyhub.
Other
Business grants
These are funds that don’t have to be repaid. Depending on your business there a few business grants available the Callaghan innovation grant and there is currently an ASB business grant available. Competition for grants can be high and a lot of the grants are for non-profits however there is quite a few that are available to businesses. Grants tend to be aimed at specific sectors, businesses or community groups such as Veterans, women, or startups.
Presales
Customers pay before an item is generally available for purchase.
Ensure that the type of funding you choose works with your business and your plans. There is no point in getting an Angel Investor that is going to require you to sell your business for them to get their money out if you want to keep your company long-term. The list at the end of each funding options are not recommendations these are just some of the options that are available.
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