Every enterprise requires capital. Whether the business is at startup or established, funding is necessary for marketing, innovation, opening new branches, acquisitions, paying salaries or conducting research. While there are several options for raising funds, your business venture should consider the pros and cons of each to pick the best. The following are the main 5 methods for raising money for small businesses.
Invoice financing is a term applied in asset-based lending where lending companies finance slow-paying accounts receivable. The invoice is sold to a factoring firm that makes immediate payment to the business. There are two methods that a business can acquire funds through invoice financing.
Invoice Factoring is a method of invoice financing where a business sells its accounts receivable to raise the working capital. The cash is released immediately to the business so that it can meet the urgent need for cash.
Factoring allows businesses to get access to cash faster than the conventional borrowing from banks. With factoring, a business technically sells the asset rather than get a loan against it. The most crucial requirement for a business to qualify for invoice factoring is customer’s creditworthiness. It is, therefore, very effective for small businesses that lack a long credit history or lack substantial assets.
With invoice factoring, a business gets 80% of the invoice while the remaining 20% is cleared once the invoice is cleared. Note that invoice factoring is only based on the company sales and is paid less the agreed fees.
Asset-based loan is a type of funding that allows businesses to finance assets such as machinery, inventory, and invoices. It is considered a special intermediate product between the bank line or credit and factoring.
When you use the asset-based loan to finance the invoice, it works like a conventional credit line. This means that the business can draw funds as clients are invoiced, and payment is done as they pay. The line allows clients to borrow 80% of the eligible receivables.
The business has to complete a borrowing certificate that determines the amount that one can access. The certificate outlines all the outstanding receivables less ineligible assets.
The best financing product for a business depends on the startup’s needs (including visa) and financial strength. Invoice factoring can be used by a business of any size, and its qualifying is relatively simple. However, asset-based loans require a company to have a reasonable financial statement and monetary controls.
Bank loans for small business
Bank loans are very useful for helping businesses improve their cash-flow, cover expenses, and plan for better growth. Many banks in Hong Kong are willing to work with businesses that are profitable to help them fill financial gaps.
What you need to get a business loan
To access funding from a bank, you must be a legal entity operating in Hong Kong. First, you must have a certificate of incorporation and an account with the bank of choice. Every bank in Hong Kong has its own rules and regulations for providing loans. Many banks require you to have a good history and some assets. As you select the bank of choice to open a corporate bank account, it is advisable to look at their lending conditions.
The main types of loans a business can access from banks in Hong Kong
: A business can opt for an overdraft that is relatively flexible and ideal for meeting short-term cash gaps. In many cases, overdrafts do not require applying each time when you need them. The loans are paid within a very short time, mainly within one to several months.
Business installment loans
: This is one of the common forms of loans advanced to businesses in Hong Kong without collaterals. The respective bank will assess your business operations, cash flow, business plan, and long-term balance sheet before approving it. It is important to ensure that the business books are in order when applying for this loan.
Other forms of credit include Business Property Financing and SME loan guarantee scheme offered by different banks in conjunction with the Trade and Industry Department.
Enhancing your business eligibility to get a bank loan
Many banks are very careful when dealing with businesses to reduce the level of risk. To increase your chances of getting a loan when needed, it is important to have a good business plan that details business operations and progress. This will demonstrate that the business has been growing from strength to strength, and its capability to repay is not questionable.
As a business, it is important to demonstrate compliance with all Hong Kong regulations. As a business economy, Hong Kong insists that every enterprise complies with all tax requirements. Ensure to check with the Inland Revenue Department to know all the tax obligations for the business to avoid getting into conflict with the law.
Build trust with other institutions. Your business will get high approval if it is part of other institutions especially expert bodies. Look for professional bodies, international standards institutions, and partnership with respective government departments.
Using capital markets to raise funds for the business
Capital markets are great platforms for raising capital for business when conventional loans are not desirable because of ensuing debt. There are various methods of raising funds through the capital markets including the following;
This is a method of borrowing from the public by issuing shares or debentures. The business must seek help from a merchant bank that will help to determine the value of the shares and transact on behalf of the clients.
This means selling securities by issuing shares to the current shareholders. A business can issue preferred shares or common stock. Preferred stock means that in the event of limited profits, the preferred shareholders are paid before the common stock owners.
If your business presents a lot of potentials and generates interest from special interest groups, it is possible to issue private placement. Many institutions such as banks, private investment groups, mutual funds, and insurance firms often scout for businesses seeking additional funds and agree on repayment terms.