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Which Funding Option is Right for your Business?

When considering how to fund different aspects of business life, it makes sense to match the different types of finance needed to the requirements of the assets. This of course is a well known business principle, so we’re going to take a closer look to see when exactly businesses should be using certain types of finance.

- Goodwill and losses should generally be financed by equity.

- Property should be financed through equity, long term loans or mortgages.

- Equipment is most likely to be purchased through asset based finance.

- Trade debtors or receivables should be financed through overdraft or revolving credit facilities, or as is becoming more common through invoice discounting or factoring.

These are just a few basic guidelines for business finance types. Part of the advantage to matching business requirements to finance measures is the ability to avoid pressure from lenders to repay loans which the business is expanding rapidly or if its facing losses and tight cash flow.

This is all very well. But what about when traditional forms of funding are not available? Many small businesses are finding that forms of long term credit, such as loans and overdrafts, are becoming less available as banks look to trim down their risky lending. If these aren’t available many businesses are turning to short term lending, such as invoice finance, in a bid to cover the gap created by the banks’ unwillingness to lend.

In light of Lords reforms of 2005 and the credit crisis from 2008 onwards, invoice finance is becoming an increasingly attractive option for many businesses as well as being promoted by financial institutions; there has also been an increase in independent lenders willing to help small business.

Now, more than 40,000 businesses in the UK are using invoice finance at various stages of business life. From start ups to established companies looking to grow, factoring and invoice discounting could be suitable. Even though many of the traditional lending options detailed above have become less available, this is no reason to think that there aren’t funding options out there for small businesses.

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