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The five best debt funding options for a growing business

By Richard Olsen

Growth is a primary ambition for many entrepreneurs. When you started your business, you had a vision, aims and objectives, which became a marker for your success.

However, growth doesn’t always happen quickly. There are many factors at play. The most significant is having the finance you need to make it a reality.

When seeking growth, debt funding is a valuable tool to improve cash flow and acquire assets to fulfil your objectives.

We’ve listed the 5 most popular debt finance solutions for growth and how they can progress your mission.

  • Commercial loans

Loans are one of the most common forms of external funding.

The advantage of a commercial loan is that it can be used for a variety of purposes, covering whatever your growth ambitions may be. They are also available from a broad selection of lenders, increasing accessibility for businesses from different backgrounds.

Loans typically come in two types: secured or unsecured. A secured loan places collateral, usually assets owned by your business, against the loan. It reduces the risk to the lender, making it easier to secure larger sums at a reduced interest rate.

If you do not have collateral to leverage, you can choose an unsecured loan. Be warned that these offer lower sums and higher interest rates to offset the increased risk – and you may be asked to sign a personal guarantee.

It’s worth researching the various loans on the market first to find one that offers a competitive deal and suits your requirements, especially given the comprehensive options now available to growing businesses.

  • Commercial mortgages

A standard part of a growth mission will be acquiring or expanding your premises. It applies if you want to scale up operations or open new locations to serve a more extensive clientele.

Understandably, property is expensive, especially if you wish to own it outright. A commercial mortgage enables you to purchase the premises you want without paying the entire value upfront. Instead, you will need a pay a deposit of at least 25% and then regular repayments, plus interest, over a terms of up to 30 years.

Again, it’s worth looking around to see what different providers offer based on your criteria so you can find the best possible deal.

  • Invoice discounting

Invoice discounting is a form of finance used to unleash capital tied up in your unpaid invoices. A lender gives you funding, up to 90% of the total value of your invoices, which you will be expected to repay later. It gives you longer to recoup funds from your customers without pressurising cash flow.

As you expand your sales, an invoice finance facility enables you to maintain positive cash flow even if your customer payment is disrupted. The facility grows as your business does, meaning any additional expenses can be covered.

The cash flow gained can also be used to fund new staff, equipment and other investment required to scale up effectively.

  • Leasing and hire purchase

Another critical part of expansion is acquiring the assets and equipment you need to facilitate rising demand. Like property, this usually requires substantial investment that few businesses can afford upfront.

In these cases, leasing or hire purchase are helpful solutions, enabling you to acquire the assets your operations need.

With leasing, you effectively ‘rent’ the equipment over the period of the lease and at its expiry you choose to take out a new contract (maybe on a newer piece of equipment) or purchase the equipment for a nominal sum. With hire purchase, you own the asset from day one, however the liability will sit on your balance sheet.

Due to their nature, you will typically pay more for assets through this route once interest is factored in. However, it still makes the equipment cost more manageable.

  • Trade or supplier finance

One way to grow your business is by moving from a domestic to an international market. By choosing to export your products, you can drive sales. Similarly, utilising imports can strengthen supply chains and increase quality.

However, there is a financial risk associated with importing and exporting. Trade finance endeavours to reduce the cashflow demands by closing the gap between your suppliers abroad and your order in the UK (in the case of import) or enabling you to be productive while you await payment (in the case of export).

This makes it easier to take your business to a global domain, which drives your desired growth.

Finance is just one part of a growth mission. You need an effective strategy that enables you to meet your targets and ensure the long-term resilience of your business.

Speak to a UKBA advisor to find out how to scale your business with the appropriate finance and support to make it a success.

Richard Olsen | UK Business Advisors (ukba.co.uk)

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