Show me the Money! Obtaining the Right Finance
Cash is the frustration of all businesses, and many companies rush off to the wrong source of finance and feel frustrated when the door is closed! This article provides some background on the different sources of finance, and provides guidelines for identifying the right source to improve the chances of success.
Bank Loans (term borrowings)
This covers a whole raft of products for which a fixed amount is borrowed with clearly determined repayment terms. The main types of loan are committed, which means the conditions for calling in the loan are set out in the facility letter (the covenants). As with any bank borrowings, security is important to the lender and so this is often only appropriate to businesses with a trading history and where some quality of assets exist.
Small Firms Loan Guarantee Scheme
Arranged through certain banks, this is a DTI backed scheme that guarantees 70% of the loan to a new business, up to an amount of £100,000, or 85% of loans to existing businesses up to £250,000. Loans charge normal commercial interest plus a premium of about 2% to cover the charges for the scheme. This makes it more expensive than a conventional loan, but the guarantee means the lender will consider loans where normal commercial loans are not available.
Bank Overdrafts
Overdrafts are the simplest form of debt finance, and are extremely flexible and easy to arrange. The down sides are that the interest rate and charges tend to be slightly higher than term borrowings and amounts are technically repayable on demand, which could affect the perceived liquidity of the company. As mentioned before, any bank borrowings require security.
Asset Finance
This includes specific finance to purchase assets, ranging from operating leases (where ownership of the asset is effectively with the lessor) through to hire purchase and commercial mortgages.
Invoice Discounting
Suitable for businesses with significant cash ‘tied up’ in the working capital of the business, but where the quality of debtors is good. This is effectively the invoice discounter advancing the money due from the customer. Specific terms may vary, altering the amount advanced, how the sales ledger will be managed, who will deal with credit management and what happens if a debt goes bad.
Grants
There are a wide range of grants administered by many bodies. In Lancaster, for example, European Regional Development Fund monies exist for forming companies and further assistance exists for projects that create jobs. Some areas, such as areas of Cumbria, East Lancashire and Merseyside, are also eligible for specific DTI supported funding. Grants are incentives and so companies must apply before they are committed.
Business Angels
Basically individuals, or groups of entrepreneurs, who have specific areas of expertise and funds available to invest. The individuals often have specific areas they are interested in, such as property or technology, and will invest early in the business life cycle. They will, however, require a significant return on their funds, an equity stake and a clear exit strategy. The big advantages of business angels are their willingness to take a risk, and their expertise which may assist the growth of the company.
Venture Capitalists
Similar business objectives to business angels, these are official organisations again with specific areas of interest. The amounts are typically £100,000 up to £millions. There are also some specialist funds, such as the Rosebud Fund in Lancashire, which may provide commercial loans with a view of assisting early stage businesses.
Working Capital
The simple principle is to manage working capital which includes controlling the timing of payments and receipts and optimising stock levels. The obvious concern is the impact on your customers and suppliers, so it is not a long-term solution. It is, however, free.
Personal Savings
Many other sources of finance will also expect a personal contribution from the company owners to show commitment to the business. A loan to the company can also be repaid to the directors without incurring tax, and interest can be charged. It should be noted however, that just because the director has sufficient funds, it may make sense to still consider other sources of funds to balance personal risk.
How we can help
As you will appreciate, the above information is complex and excludes some options such as initial public offerings and use of pension funds. CLB Coopers can help you whether you need support in developing your business plan, identifying the right source of finance, meeting with the potential lenders or restructuring your business to improve your cash flows.
For further information please contact Tony Whiteway at twhiteway@clbcoopers.co.uk