A guest blog by Andrew Smith of Outside The Box Finance Ltd
Successful business growth often hinges on obtaining the right funding. We asked Andrew Smith, an expert in independent business finance to talk us through the basics for our ‘Summer of Growth’ series of articles:
Throughout this pandemic, many businesses have flourished, others however have had to call on cash reserves or borrowing to survive. Whichever camp you fall in, growth from normal trading levels or reduced trading levels, can put a strain on working capital.
A very high percentage of small businesses fail due to cashflow problems, some, linked to overtrading. Understanding the right way to finance a business and having adequate liquidity is of paramount importance.
Let us look at the type of finance that supports a business whether growing or recovering:
Invoice finance – in my opinion, this finance product provides the most flexibility for a growth in business turnover, by releasing cash against eligible debtors and thus providing some protection, from overtrading. Typically, 80% is advanced against an eligible debtor but for some sectors, up to 90%.
Invoice finance can take the form of invoice discounting (ID) mainly on a confidential basis and a business manages its own sales ledger.
Factoring is another option where a finance company often manages the debtor collections (not in all cases), and customers are aware of the existence of the factor.
ID and factoring are normally more expensive than an overdraft but will release more cash from debtors than a bank would normally allow on an overdraft. For the facility, you pay a discount rate (an interest rate as with an overdraft) and also a service fee as a percentage.
NOTE – not all businesses are right for invoice finance – it will depend on a number of factors including the type of business and eligibility of debtors. A personal guarantee is often not required, but, if necessary, may be at a nominal level compared to a bank overdraft. Factoring in the past, often had a ‘stigma’ as the last option for financing. I do not believe this is the case today.
Bank finance – overdraft and loan.
The overdraft – we all know what it is. Remember, it is repayable on demand and so not assured like a loan, where with the latter, providing you meet the terms, it cannot be called-in. Depending on the overdraft limit, a full personal guarantee and supporting security may be required – should you put your home at risk, with it being the ‘tangible’ supporting security banks require? An overdraft will often not grow fast enough with the growth of a business. If your cashflow forecast shows your account will not fully fluctuate debit to credit, an overdraft may not the right approach.
Banks have many different names for their loan product ranges but ultimately it is ‘just a loan’ – we all know what they are. The new recovery loan which provides an 80% guarantee from the government, has no personal guarantees on loans up to £250k, is perhaps one option to consider. I am still to be convinced of the banks’ willingness to support this type of loan with only an 80% government guarantee on offer – I hope to be pleasantly surprised.
Asset Finance – an important type of funding for businesses, which specifically links to the asset and repayment is over a period. Valuable working capital is not tied-up in asset funding other than with the deposit that is often necessary.
Various options are available including hire/lease purchase, finance lease, operating lease, contract hire. A refinancing option of an existing owned asset, enables a cash injection into the business e.g., the refinancing of say, engineering equipment, vehicles etc. But please note, this is not normally a cheap finance option.
As you can see, there are various asset finance options available and a discussion with your accountant, to assess which is the most tax efficient option, is sensible.
Other types of finance – such as private loans, business angel funding, venture capital, funding circle, crowdfunding – this list is not exhaustive.
Whatever type of finance a business requires to fund its growth and to ensure it has adequate liquidity, requires careful consideration.Andrew Smith is Director of Outside The Box Finance Ltd, asset and bank finance specialists. With decades of experience and longstanding bank and funder relationships to draw on, Andrew assists clients through the financial maze of conventional bank funding (commercial mortgages, development finance, etc), re-banking exercises, asset finance (HP & and lease), and invoice discounting/factoring.
