Business Loans, Asset Finance or Equity: Which Funding Route Fits Your Growth Plan?

Expanding your business can be challenging; investing in new equipment, hiring new staff or creating new products all cost money. Funding can help your business grow, but choosing the right funding option can make all the difference.

Funding is more than just how much you can borrow; it’s about choosing the right finance for your business and making sure it works alongside your business goals.

Business loans, asset finance or equity can aid your finances in different ways and depending what you intend on using the funding for will depend on which one is the right fit for you.

Why Funding Matters?

Funding can act as a strategic tool for your business and allow you to grow your business whilst elevating some financial pressure.

It can be used in multiple ways to help your business grow and expand; from starting a new business to hiring more employees, investing in new equipment to expanding into new markets or launching new products.

What Are Business Loans?

Business loans are a common choice of finance for businesses. This is where an amount is borrowed from a lender and then paid back with interest over an agreed time period.

There are different types of business loans your business could consider:

• Secured loans – Loans that are backed with collateral, such as property or equipment to allow for larger borrowing at reduced rates
• Unsecured loans – This relies on the credit score and financial health of the business; there is no collateral but there could be higher interest rates
• Working Capital loans – These are short-term funds which can be used to pay wages, rent or stock
• Start-up Loans – These are loans backed by the government for new business ventures. These allow someone to borrow between £500- £25,000 for an interest rate of 7.5% a year between 1-5 years
• Peer-to-peer – Borrowing from private investors rather than traditional high-street banks

Business loans require an application beforehand where financial records and bank statements are provided to the lender before they set a borrowing limit, interest rate and repayment period.

Once this has been agreed, the business must pay the loan and interest on the agreed schedule, whether this is monthly or weekly.

What is Asset Finance?

Asset finance allows for a business to spread the cost to purchase equipment, vehicles or machinery without having to pay the full price upfront.

This involves making regular payments over time whilst using the asset to help pay it off.

Different types of asset finance include:

• Hire purchase – This involves paying a deposit and fixed monthly amounts over an agreed time, then you can then own the asset in the end by paying a small fee
• Finance lease – Your business rents the asset, so there is no opportunity to own it but you can carry on renting it, sell it for a share of the profit or give it back
• Operating lease – You rent the asset for a short period of time and then hand it back once you are done
• Refinancing – You sell equipment you already own to a lender and then rent it back to keep using it whilst freeing up working capital

What is Equity Funding?

Equity funding is where businesses gain money by selling ownership shares of their business to investors. The investor pays to be a part of a business and then invests in a share in future profits the business makes.

With this, investors can guide your business in a different direction as they now own part of it. This means you may lose some control over decision-making and share profits the business generates.

However, this provides instant money to which there is no debt to pay back and investors can provide useful advice to help your business grow.

How to Choose the Right One for Your Business

The funding that is right for your business is dependent on what stage your business is at, what cash flow requirements you need and what the goals are for your business.

Before selecting funding there are multiple factors you need to consider:

• How much money you need
• How long you are going to need the money
• The risk level
• The cost of borrowing
• What the repayment terms need to look like for you

Business loans are more tailored to businesses with an established cash flow or structured startup costs as this allows you to keep full control over your business.

Asset finance is more suited to businesses wanting to purchase or use new equipment, whether this is to boost production or improve quality.

Equity funding is more focused on large capital injections and is better for high-growth startups that also may need mentorship.

How to Prepare Your Business for Applying for Funding

If you are considering getting funding for your business, you will need to prepare beforehand. This includes financial records, proof of market demand and your business plan.

Investors will want to see your business’ organised financial records as this allows them to measure the potential risk by evaluating previous performance, ultimately seeing if the business can generate a strong return. They demonstrate how your business handles capital, controls costs and sustains operations.

Proof of market demand is also important for investors because it will help lower their financial risk. This evidence shows that customers want the product and how much they are prepared to pay for it.

Your business plan shows them proof of what you intend on using the money for and how you will generate money back. It outlines a clear strategy and also highlights any financial risks before investors agree to fund your business.

Mistakes to Avoid

Securing funding for your business is a big step but there are several common mistakes to avoid that can influence the success of your business.

Raising the Incorrect Amount of Capital

If you choose to fund your business through equity, selling too much equity means you own less of your own company and results in less control over decisions being made.

Asking for a high amount of capital through business loans can also put investors off as it increases the financial risk. Should investors provide the capital, they will have larger expectations of the returns from their money.

Additional capital can also result in unnecessary expenditure or the business growing faster than they are prepared for which can result in bad decisions.

However, not raising enough capital also comes with issues. Not having enough money will leave you short before reaching profit and can force emergency fundraising.

Asking for too little funding also suggests to investors that your business has poor planning as you haven’t accounted for potential hidden operational costs.

It suggests a lack of understanding in what you want to achieve as you are unsure of the money you require to achieve your goals.

Applying For Capital Too Early

If you start applying for funding without being prepared, this can reduce your negotiation position with lenders.

If you are unable to prove the market demand or your business plan before requesting funding, this can result in lenders having less confidence as they can’t see how their money will be used or understand what the return will look like.

Choosing the Incorrect Funding  

Choosing the wrong funding for your business can damage a business’ finances. It can result in draining your business’ cashflow as you may need to make larger payments over a shorter timeframe.

The incorrect funding can also result in you having to pay a higher interest or take away control and force you to sell parts of your business.

An alternative funding method may have worked better for your business and resulted in smaller more long-term payments that were more manageable for you whilst your business grew.

There is no one option that works for every business; each method of funding has their own purpose, benefits and risks which is why it is important to consider each one carefully before selecting an option for your business.

Preparing your business for funding and choosing the right funding for your business to support growth will help you achieve your businesses immediate needs and long-term goals.