Many different factors go into starting and scaling a successful small or medium enterprise (SME). But what may be the most important factor of all is how you choose to financially support it.
In this post we are going to discuss the top 5 ways for SMEs to finance their companies, starting with the most common of all: a loan from the bank.
1. Loans From Financial Institutions
The most common form of financing for many SMEs is through a loan from a bank or another financial institution. The problem with this type of loan, however, is that banks are historically risk-averse and may be less than willing to provide you with the capital necessary to start or scale your business.
2. Bootstrapping It
With banks being less willing to provide loans, a lot of small and medium sized businesses have taken to what is known as “bootstrapping”. Bootstrapping involves borrowing money from people in your personal networks, including family, friends, employees and investors.
3. Overdraft Financing
A financial institution may offer an overdraft facility to businesses who have grown to a certain size. Overdraft facilities allow for a cash account to go into a negative amount so that businesses can continue to run even if they are short on cash flow.
4. Lines of Credit
Through a line of credit, businesses can borrow money from the bank when they need to. This type of financing is usually “secured” against an asset such as your home or other owned property. Because it is secured, the interest rate is typically lower than other types of financing. But keep in mind that the bank has the right to either sell or refinance that asset should a business not be able to pay back the loan.
5. Invoice Financing
Depending on the industry you are in, you may be able to take advantage of what is known as “invoice financing”. For example, if you have strength in your accounts receivable and can prove you will be able to repay a loan, you could request that you repay a financed amount at a later time.
The type of financing you choose for your Western Sydney business will depend on your business goals, your industry, and your need to scale. As your business matures, ATP Tax Accountants can help you to re-examine your financing options.
To speak with a professional accountant about which type of financing is the most beneficial for your company, we welcome you to speak to an experienced accountant at ATP Tax Accountants. We invite you to contact our friendly team by email or call us today at 1300 829 484.