How to Fund your Small Business when Interest Rates Increase

When the economy improves, interest rates tend to rise over time. While interest rates have been on hold at low record levels for many months, this will not be the case forever.

For small business owners, an increase in interest rates means securing their sources of capital earlier rather than later. This would allow them to have a facility available when they need extra cash flow.

There are 5 funding options available for small business owners:

Factoring of receivables

When a business is paid cash in return for the legal rights to monies payable to it from a sale, or its accounts receivables, this is called factoring. With this method businesses that have normally lengthy receivable arrangements can get more cash faster than it otherwise would. Businesses need to ensure that they have sufficient margins to take in the cost as cash obtained from factoring is a mark down from your invoice amount.

Pre-selling of products or services

This method of funding is commonly seen in crowdfunding campaigns, or in tasks that will need large resources to accomplish. Pre-selling of goods or services is when a business asks to be paid upfront, before they deliver the product or services. Businesses can use the cash to complete the delivery to the customer without incurring any financing costs. They are also not selling equity, which is advantageous. On the other hand, they are inputted as a liability to the customer on the business’ books until they deliver the product or service. Both customers and businesses can make this a win-win situation by setting clear and upfront terms.

Traditional lending

Though banks may be open to extend a loan to small businesses, they normally ask for three years’ worth of financial statements and for tangible assets to guarantee the loan, in case of a default. With credit cards, however, the requirements may be minimal but you may have to pay much more. These funding sources may be suitable for some businesses, but may not be easily available to others.

Alternative lending

Small businesses can avail of private investments from Funding Circle, Dealstruck, Kabbage and others without the rules and requirements normally requested by financial institutions. These sources of funds can be useful in taking a business to the next level. However, expect to deal with a range of costs. Also, rates can be higher compared to traditional loans.

Equity Investments

Smart investors understand the benefits of diversifying their portfolios. Owners of small businesses may have a large portion of their wealth invested in their business. Aside from helping owners “take some chips off the table” and spread their personal wealth, equity investments can also build strategic relationships and knowledge that trigger business expansion. But you should always have a main purpose other than money when selecting your equity partner.

When you are considering options on how to finance your business, always remember not to assume too many risks. Make sure you do not overextend yourself in your pursuit of funding. So, consider establishing an orderly repayment plan that is founded on real data and practical expectations.

Get up to date financials from your accountant and use the data to gain a clearer image of what stage your business is in and what it requires. You can also use it when making a decision on debt or equity facilities.

PJS Accountants provides a full range of services including accounting, taxation, business improvement, superannuation, business valuations, asset protection, succession planning and bookkeeping. For enquiries, contact PJS Accountants.