How to Select the Best Financing for Your Small Business

Home/Tips/How to Select the Best Financing for Your Small Business

July 2022

Whether you’re looking to grow your business by hiring more staff or adding a new storage facility, there is a range of finance options you can explore as a small business owner.

Let’s explore four of the most common types of financing options to guide you on which best suits your situation. Each of these options allow you to access capital without losing a stake or equity in your company.

Business loan

A business loan is an umbrella term to describe a sum of money lent to your business. The loan amount may vary, as can the term. Other variables include fees, security, the interest rate, and whether it’s fixed or variable.

Business loans can be secured or unsecured. You might use such a loan to invest in working capital, renovations, or staffing, for example. Secured loans usually need a physical asset, such as inventory, accounts receivables, or property, as ‘security’. Generally, secured loans have a lower interest rate as lenders see them as lower risk than an unsecured loan.

An unsecured loan is usually for a smaller amount and may be quicker to assess. The lender would consider your business cash flow and strength as ‘security’.

Invoice finance

Invoice financing lets you access funds by borrowing against your outstanding invoices. These may include:

  • Accounts receivable financing
  • Receivables financing
  • Invoice discounting
  • Cash flow finance.

Invoice financing can be convenient, as larger companies and government authorities can take time to pay their debts to small businesses. Invoice financing means you’ll have near-instant cash for your business operations for a small interest fee.

Equipment financing for business

If you’re looking to purchase high-value equipment, then taking out equipment financing could be a good option. Businesses owners can then pay off assets over time, rather than pay the total amount at the time of purchase.

Equipment finance options include:

  • Specific Security Agreement (SSA): also known as a Chattel Mortgage, SSAs are similar to a home loan. An SSA is a secured loan – the asset acts as security for the lender, but is owned by the business owner. You can claim depreciation on the piece of equipment and interest costs on the loan, and both may be tax-deductible.
  • Finance lease: The lender buys the asset and leases it back to you for a particular lease period. You will have the option to purchase it at the end of that period. Repayments may also be tax deductible.
  • Commercial hire-purchase: You’ll pay the full asset price in instalments over a specific period. Once the final payment has been made, ownership is transferred to you. You can claim the depreciation deductions and the interest portion of the repayments on your tax.
Lines of credit
Through a line of credit, your business can access funds up to a limit, similar to a credit card. However, interest is only paid on the sum withdrawn rather than the total amount. You can choose between a line of credit that expires, or is ongoing. For the latter, all funds must be repaid before it gets topped up, and you draw it down again. That saves you from having to reapply.

Lines of credit are convenient for buying inventory and paying for day-to-day expenses when cash flow falls short. Keep in mind that the interest rate tends to be higher than a business term loan.

How we can help

We have the tools and expertise to guide you through the types of business finance options and which solution might be the best fit for you. Contact us today.

The information in this post is provided for general information only and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from financial, legal and taxation advisors. Although every effort has been made to verify the accuracy of the information as at the date of publication, Geared Finance, its officers, employees and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy, or omission from the information for any reason, including due to the passage of time, or any loss or damage suffered by any person directly or indirectly through relying on this information.

Keep reading