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External Sources of Finance: Advantages and Disadvantages

Published on 30th October 2018 - Last update on 9th October 2019

At every stage in your business’ development, you’re going to need the support and reassurance that can only be found by having access to enough capital to back you up. Yet, although it is a key ingredient for growth, innovation, sustainability and your long-term success, capital isn’t easy to come by - especially in large amounts. This can make it all too tempting to turn inwards and draw upon your own savings, but doing this could cause further problems later in your development.

Instead, a wiser course of action could be to explore what external sources of finance are on offer. But although this can be a great way of raising capital for your business, it’s also a decision that is not to be taken lightly. So in order to make an informed decision, benefiting the whole of your business, understanding the advantages and disadvantages of external sources of finance is of the utmost importance.

Advantages of external sources of finances

One of the greatest advantages of using external sources of finance is that your business has access to a wide range of business finance solutions. Rather than depleting your own savings or drawing funds away from key areas in your business, you now have a variety of financial tools at your disposal, providing you with the means to raise and borrow the capital your business needs.

Plus, as well as enabling you to spread out large expenses and make them more manageable, external sources of finance can also be used to benefit any aspect of your business since many of the products on offer aren’t subject to specific usage restrictions. As such, external sources of finance could help to speed up your growth, acquire new equipment, purchase property, support uneven cash flow, release equity, fund marketing campaigns, replenish supplies, provide emergency relief and much more.

In addition, depending on your chosen product, many on offer are also available for a wide range of financial situations. Even if you possess an adverse credit rating or don’t currently own any business assets, you could still use external sources of finance to continue driving your company forward.  

Searching for a way to provide additional funds to your business? Need help sourcing a suitable finance agreement? Apply for Alternative Business Finance or learn more about how your business could benefit.

Disadvantages of external sources of finances

On the other hand, despite being a vital tool for developing your business, using external sources of finance also has its disadvantages. Because using business finance typically involves interest, lender service fees and legal costs, supporting your business this way will cost more than using your own capital.

Plus, although possessing an adverse credit rating may not always lead to your business being rejected (depending on your chosen product), it will have a direct effect on the amount of interest you’re charged throughout the agreement. As such, the weaker your credit rating, the more expensive the agreement will be and vice versa. This is why before applying business finance you should always generate a credit report with one of the UK’s leading credit agencies (Equifax, Experian or TransUnion) in order to spot any issues and find a solution, if possible. Especially since lenders will always carry out any necessary checks, including whether you have any recent or past CCJs, Accelerated Payment Notices, unresolved debt (e.g. credit card debt) and your history of repaying debt on time.

In addition, some finance solutions may require your business to present collateral. This typically takes the form of unencumbered assets such as equipment, machinery, vehicles, land or property. However, some products may use other methods to provide Security, such as the collateral tied up within unpaid business-to-business invoices. Although this could help raise lender confidence and encourage them to offer a more favourable interest, it does, in fact, leave your assets at risk of repossession should your business default on the payments. Nevertheless, there are Unsecured products available, but they often possess higher interest rates and stricter application requirements on account of the increased risk to the lender.

Thinking about applying for external sources of finance?

Although acquiring the funds your business needs to pursue and achieve a sustainable future is a vital responsibility that can’t be ignored, you may naturally want to turn to your own savings. However, doing this is often a risky strategy that could prove problematic in the long-run. However, the Alternative Finance industry is making it possible for more and more business owners to dream big and succeed. The only issue is that, with so many different finance solutions to choose from, how can you be certain that you’re applying for the most suitable finance solution from a lender you can trust?

At Rangewell, we’re an Access to Finance specialist and have mapped over 400 lenders to give business owners an overview of more than 23,000 business finance products. Our services are free to use and we’ll also guide you through the application process from A to Z. So if you’re looking to raise funds for your business, apply for Alternative Business Finance today or find out more with Rangewell.


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David Harrison

David Harrison

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