Growing your business requires capital. There are a number of business owners who have successfully bootstrapped their way to success however, this is the exception rather than the rule. Most businesses require finance to grow their business quicker. You may need to choose debt finance or equity finance. It’s important to know about the pros and cons of both and the different options within those categories so you can decide what’s the right fit for you.
Debt Finance
Debt finance for small businesses generally means a business owner takes out a loan from a bank or a non-bank lender. You can either access a lump sum or have access to a rolling facility and repayment terms can vary accordingly.
How Debt Finance Works
Firstly you need to consider the purpose for which you need a loan. Generally business owners might need working capital, vehicles & machinery, or have a bigger capital expenditure project. Then once you know how much capital you require and over what term will help find the type of business loan that will suit your need. There are 3 main types of business loans in Ireland:
Installment business loans. This is your traditional lump sum, set repayment term & repayment amount business loan. They can be secured or unsecured.
Revolving business loans. This gives your business a facility that can be drawn on as needed. A typical example is a bank overdraft.
Cash flow loans. This type of loan generally gives you a lump sum but repayments are flexible based on revenue you are taking in. An example is a shop owner getting a merchant cash advance based on their card machine turnover and repaying a set percentage.
After you have considered the type of loan that fits now it’s time to compare lenders on the Irish market. Usually you can get multiple offers to compare & choose the best deal. The lenders also have their criteria that you need to fit before you can get your approval. The primary considerations are: how much your business is turning over, how long you’ve been in business & general creditworthiness.
For most bank loans in Ireland your personal credit history is important and requests for personal guarantees are more prevalent. Many non-bank loans have less requirements to get funded.
Pros & Cons of Debt Finance
In considering what’s the best debt finance for you, it’s good to weigh up the pros & cons of using debt to grow your business:
Pros
You retain control: If you don’t go for debt finance the main alternative is equity finance. This means you’re giving up a piece of the pie. Investors give you capital for a share of ownership. As a business owner you will have to consider your shareholders wishes going forward. With debt you make your repayments with interest and retain full ownership.
Debt can be easier to find: For many business owners it’s hard to find investors. You need a unique proposition. If you’re a “me-too” business but you have the skills, connections and can take enough market share to have a viable business you will find debt finance.
Lots of options: If you’re a startup it may rule out some options but so long as you have revenue coming in then options open up quickly.
Flexibility: While there are 3 main types of business loans in Ireland, there is flexibility with lenders in terms & repayments. Many lenders offer simple unsecured business loans from 6 months to 60 months. Often there is no early settlement penalty so you can fix it up and save on interest during term. Or if you need to top it up or extend, loans can be refinanced.
Interest can be tax deductible: It’s good to discuss your tax position on business loans with your accountant. Many business owners can find ways to save on tax and lenders can be accommodating. For example, if you get a machine on a lease you can have an option built in to an agreement to buy it out for a nominal fee at end of term.
Cons
Expense. Startups or businesses that have some missed payments in their bank statement history can find the interest rate they’re quoted is costly.
Declines. Your loan application will be declined if the business falls outside of what underwriters can quote for.
Personal Guarantee. Many bank & non-bank loans in Ireland require personal guarantees. They are more prevalent in Ireland than other countries. This means you can be held personally liable to repay a loan even if the business has failed.
Choosing Debt or Equity Finance
Debt finance gets you a loan from a lender and you repay it with interest. Equity finance dilutes ownership but gets money for the company to grow with less risk to the owner.
To win over investors they will want detailed information. It’s not just a winning pitch deck, your equity ratio will be of key importance. If you’re overly leveraged with debt and the business hasn’t got a lot of assets to note they’re unlikely to be interested. A tiny percentage of Irish businesses that pitch for investors get funded so equity from venture capital firms & angel investors is out of reach for most. You may have more success in equity crowdfunding platforms if your business has some traction. Expect to have to find some investment from your own network & to work hard at promoting your crowdfunding round before the equity platform can credibly promote it to their network of equity investor members.
Types of Business Loans
There are many business loan options on the Irish market. Here we break them down in more detail.
Bank Loans
Banks offer a range of medium and long-term loans to support Irish businesses. The key difference from non-bank loans is they have stricter eligibility requirements than non-banks. Often they will want a lot more information that can add expense to you by having your accountant do the work to produce it.
That being said the interest rates can be much lower, especially now that the banks are working in conjunction with the SBCI in approving government-backed loans for qualifying businesses to aid Ireland’s economic recovery.
Non-bank Loans
Most non-bank loans in Ireland come from peer-to-peer lenders and other private business financiers. For this type of loan you generally need recent accounts, 6 months bank statements and an up to date tax clearance certificate. You can choose a term from 6 months to 60 months, depending on purpose of funds. Usually you get a decision in 24 hours and a rate is applied based on risk. Underwriters will grade it A, B, C or D and often apply rates from 6% to 12%.
Business Line of Credit
The typical line of credit in Ireland is the overdraft approval on the business bank account. You can draw on it up to a set limit. In recent years overdrafts are less prevalent & limits have been less generous.
Another example of a line of credit is an ongoing invoice finance facility. This can be approved based on the value of your book of debtors. Business owners can release up to 90% of the value of the invoice quickly and get the rest when it’s settled. What’s newer to the market is one-off & ad hoc invoice finance. It works well for businesses that might have a busier time of year or some other irregular need for a line of credit.
Lines of credit are can have higher interest rates and shorter terms. To get better rates and terms sometimes your business needs more successful trading history.
Asset Finance
Many Irish businesses are able to get asset finance because the lender has collateral. If you are buying equipment, machines or vehicles the lender will use it as security that can potentially be taken away on failure to pay. The asset has a clear value and the lender has less considerations & risks about performance of your business as an unsecured lender.
Bear in mind, lenders still have qualifying criteria. They will not be keen to be involved in all industries or finance all assets. The good news is that there is a broad spectrum of lenders in the market with different niches.
Venture Debt Finance
This type of finance is on the rise in recent years. As noted there is complexity around traditional equity finance that makes it hard to achieve for many business owners. Venture debt deals are usually constructed as a loan note that have an agreed interest rate. Then on top of this the loan note can include an option for it to convert into equity in your company. It’s a more straightforward transaction and gives more comfort to the lender.
Royalty Finance
This is another finance option that’s newer to the Irish market. It’s an alternative to debt finance that gives you a set amount of money in return for a set percentage of future revenues over a certain period of time up to a certain amount. The key benefit is that you are not giving up equity and you get money to grow. You keep your motivation to work hard to grow the business in keeping your equity & there is less red tape in constructing these deals over equity finance.
Merchant Cash Advance
This is an option for any business who uses a card machine, Stripe, PayPal, Just Eat, Deliveroo etc. You don’t need to be trading long, even 6 months history can work. However this is not the the cheapest form of finance. An advance is offered based on your merchant account turnover and a set percentage is agreed for repayment. If you’re busy you pay more & if you’re quiet you pay less. A set amount is agreed to be repaid over time.
The BusinessLoans.ie view on debt finance
The debt finance option you choose will greatly affect the route your business takes in to the future. You are the business owner and you need to decide on the vision you have for your business, your appetite for risk and choose your debt / equity structure. Always seek out professional financial advice from your accountant. For fast finance quotes call 01 55 636 55 or email hello@businessloans.ie.
