Access to finance is a crucial factor for businesses to drive growth, innovation and, in some cases, survival. For entrepreneurs, the world of financing options can seem both complex and overwhelming.

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Whether it's to start a new business, expand your business, or take on temporary financial challenges, it's important to understand the different funding options available.

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Each form of financing has advantages and disadvantages, and what is best for your business will depend on factors such as your company's size, industry, growth phase, and specific needs. It is also important to understand the financial implications of different forms of financing - interest rates, repayment requirements, possible collateral, and how these may affect your company's cash flow and finances in the long term.

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In this guide, you can read about the most common forms of financing that businesses can use, provide insights into how they work, and hopefully help you decide which one is best for your company's unique needs and goals.

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Traditional bank loans

Traditional bank loans are one of the most established methods of business financing. Banks provide security and often offer low interest rates and favorable terms, making them an advantageous choice for long-term investments such as business growth or major purchases. However, the process of applying for a bank loan can be time-consuming and requires extensive documentation, including business plans and financial statements. They also tend not to lend to smaller businesses as these do not generate enough returns for the bank and are considered too high risk, so bank loans are not an option for the vast majority of businesses. However, for companies with a strong credit rating and a firmly established business model that can access a bank loan, it can be a cost-effective option for financing.

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Digital actors

Technological developments have led to the emergence of a number of digital players focused on financing all the businesses that banks do not lend to, such as Froda. These companies have built processes and credit models tailored to small businesses, allowing them to offer access to finance both faster and with less bureaucracy than traditional banks. Digital players are often characterized by user-friendly interfaces, fast approval processes and disbursements, making them an attractive option for businesses in need of financing.

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Overdraft facility

Overdrafts, also known as business credit or overdrafts, are a flexible solution that allows businesses to access finance up to a predetermined limit. It is particularly useful for dealing with unforeseen expenses or short-term liquidity problems. Repayment is usually flexible and interest is calculated only on the amount drawn down.

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Factoring

For businesses with long customer payment terms, factoring can be an option to improve cash flow. Factoring is a financing method where companies sell their outstanding invoices to a third party at a discounted price to get paid directly. Factoring allows companies to quickly convert invoices into cash, enabling more efficient capital management and the ability to react quickly to business opportunities.

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Leasing

For businesses that want to avoid tying up too much capital, leasing can be an effective way of financing the company. Through leasing agreements, businesses rent equipment for an agreed period instead of buying it. This way, businesses can have access to the latest equipment without the large upfront cost associated with buying. In addition, leases can often be tailored to suit a company's specific needs and budget, making it a flexible option for small to medium-sized businesses.