Funding for SME's - what are my options?

When investigating possible funding sources for your business, key questions to consider are:

• How much funding is needed?
• How will the money be used?
• How quickly is the money needed?
• How and when will the money be repaid? 

There are a range of funding options depending upon your answers and you should be aware that more than one source of funding may be appropriate. In essence, funding falls into one of two categories, debt or equity. 

In this article, we focus on a particular form of debt funding – asset backed lending.

Asset backed lending
Finance can be raised using specific assets as security; this is known as asset backed lending. The most common form is a mortgage secured on property or land. The clearing banks and a number of specialist companies also provide other forms of asset backed finance. Finance by way of a loan, is normally provided using an existing portfolio of assets as security against fixed assets such as plant and machinery, sales invoices or on occasions, against stock. Before a loan is made, the lender will normally insist on a valuation or review being carried out by a third party.

Confidential Invoice Discounting (CID) or factoring refers to where funding is advanced against sales invoices raised. The major distinction between the two is that with discounting, you retain control of the administration of the sales ledger. Some years ago many people were reluctant to use discounting or factoring due to the perceived stigma. Sentiment has changed and CID, in particular, is frequently used, especially as a result of its promotion by the banks on account of regulatory changes and commercial factors in the banking sector. 

Factoring and discounting are not suitable for all businesses. They are typically longer term arrangements that can have a major effect on the development of a business and, as such they do not always suit. Finance can also be raised against stock. This is more specialised and is typically linked to a factoring or discounting facility. Such a combination of facilities can work well if goods are being imported (as is the case with many businesses, who now source from, say, the Far East) where lead times are relatively long. Such facilities are known as “trade finance” or “import finance” facilities. Typically, the goods being imported will be finished goods (so that they have a transparent resale value) and the business can provide evidence of confirmed orders from customers. Payment will involve Letters of Credit and the loan will be repaid from the factoring or discounting advance proceeds when the sales invoice is raised.

So how do I now go about securing funding?
The crux is the preparation of a well thought out and documented business plan that includes detailed profit and cashflow projections. This plan can then be then presented to the prospective funder to address the 4 questions set out at the start of this article. The more convincing the plan is the more the likelihood of success. 

Before you rush off to start drafting though, take a step back, reflect and then give us a call to talk it through.