Clive Lewis, Head of Enterprise at the ICAEW, offers some advice for businesses on how to source finance.
Access to finance over the last few years has been difficult for many established as well as start up businesses. However, while it will probably continue to be difficult for businesses for the foreseeable future, there are options. Here are a few key questions to consider before seeking finance:
• Could you manage without external finance by changing your business practices such as reducing the time your customers take to pay your invoices or increasing the time you take to pay for supplies?
• How much are you looking to raise?
• Are monies needed for short or long term needs?
• Are monies needed for growth or just to sustain your business?
• Are you prepared to offer security over an asset being personal or business?
• Are you prepared to bring in an outside investor and give up either a minority or majority stake?
Restructuring — in this instance the business looks at the existing finance in place and restructures this which may free up additional monies and/or reduce the cost of borrowing. It is more usually used where a business is unable to pay its debts and the finance providers agree to re-schedule the debts to give the business more time to pay.
Loan — these are monies borrowed for a set period and set repayment dates with fixed or variable interest applied. Normally this type of finance is secured whereby the lender has a charge over asset(s). Often has conditions attaching to the loan which can trigger a demand for immediate repayment if they are not met.
Overdraft — the lender would provide a facility with a limit with an agreed interest rate and probably secured. The business can dip in and out of the facility up to the limit. Businesses like overdraft facilities because they offer flexibility but they are repayable on the bank’s demand so care must be exercised if operating an overdraft, particularly when near the facility limit.
Outright Purchase or Deferred Payment — if you are considering capital expenditure the asset(s) can either be purchased outright or paid for by instalments. There are various types of deferred payment - hire, hire purchase or leasing. Leasing can be either a finance lease or an operating lease. Each type of deferred payment is different but essentially you use the item of capital over a fixed period with regular payments.
Mortgage — a mortgage would normally be used to finance a property acquisition or to expand an existing business premises. The features of this funding are similar to the bank loan above with the mortgage usually being secured over the premises.
HMRC Time to pay arrangements — this service is designed to assist all businesses and individuals who are unable to pay their tax being income tax, corporation tax, VAT, PAYE and national insurance. There are conditions and stipulations attached and the business must be in genuine difficulty and unable to pay their tax on time. This option may not be appropriate in all cases and could indicate other business issues which need to be addressed.
Self funding, friends and family — this can be a useful option if you, with your own funds or those of friends and family, inject monies into your business. This can be by way of a loan or equity finance. It is important to understand the expectations of the family and friend on what they will receive back. To avoid arguments the key features of the arrangement must be put into a written agreement.
Equity Finance — if you obtain equity finance whether from say friends, family, business angels or other private investors, be prepared under this option to relinquish a share of your business.
Small scale equity — business angels bring (up to £2 million) finance to a business and they normally have experience in what makes a successful business. They could ask for a stake in your business and so it is important for you to consider how much you are prepared to give up. For finance over £2million you would need to talk with venture capitalists who would also look for a stake in your business.
Debt Factoring — the sales debtor book is used to provide finance where the factoring company pays a percentage of the debtor book immediately to your business. The balance is paid once the debt is collected from the customer.
Providers of finance will usually have stipulations, financial and non-financial conditions and it is important to review these on a regular basis. Discuss any potential or actual breaches with the providers of finance early.
In situations where you are going to a third party for finance they will often ask for an up to date business plan, financial statements along with cash flow forecasts. They need to be as realistic and up-to-date as possible.
I would recommend that you discuss the key questions above with your accountant to explore the answers and seek assistance pulling together the information as required to secure the business funding you need. Finally, have a regular dialogue with your finance providers and, when requested, provide up-to-date management information. From time to time review with them the type and size of your funding requirement.
Access to finance is challenging but your accountant can help you to choose the right finance for your business by offering independent advice based on their experience with a number of businesses.
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