31/05/2011

Every business needs finance

By Neil Lancaster, Partner At Adams Moore

Raising Finance is a key consideration of any new business start-up and those already in business. From commencement and through its development and growth, every business will need finance. But what type of finance is best suited to the development of your business, and who should you approach for funding? The finance types available are vast and knowing what you need and planning your approach to any lending situation is vital.

Firstly, if planning for growth, Is finance required? Finance is very often necessary but consider what it will entail. Additional funding requires a commitment in terms of capital and interest payments, therefore embarking on this course of action must be planned carefully. The business must be capable of sustaining any additional commitment to growth or expansion, and consideration will need to be given to effects on manpower, materials and space.

Always consider tapping into existing resources before seeking outside finance – as a business should consider whether it could improve its working capital from within. Particular attention should be given to stock and debtors to ensure that both are kept to a minimum. Consider how long it takes to bill customers and collect debts and look at ways to reduce this time. If there are periods of time when surpluses of cash arise, review your affairs to try and ensure these are being used to generate income by investing on temporary short term deposit.

Plan, plan, plan. If external funding is necessary, planning is essential in achieving success. A well-drawn up business plan not only confirms in your own mind the nature of the project and the timing of any required funding, but is vital to any lending institution. Financiers are unlikely to provide any assistance without a properly drawn up business plan.

The plan will need to include details of:

– the objectives and aims of the business

– the purpose of the required funding

– the business ownership and history

– management and responsibilities

– products and market share

– sales plan and strategy

– the financial position of the business with detailed cash flow forecasts and past accounts

Finance is available in many forms and it’s important to make sure that it is right for your business. Look out for onerous terms and inflexibility, which can often hinder a growing business. The more obvious sources of finance include bank overdrafts and medium to long term loans and mortgages, but rates of interest can vary considerably. Therefore it is advisable to consult with your accountant or business adviser before making your final decision.

Specific methods of finance are available for acquiring assets or releasing cash from debtors. Carefully consider the options available, such as leasing assets, hire purchase, outright purchase, debt factoring and invoice discounting. Each method of funding has advantages and disadvantages including implications for tax purposes.

Other means of finance may be available for your business from government sources, through the issue of shares or even your own pension scheme. Government assistance can be in the form of grants, loan guarantees or an enterprise capital funds. Other grants may be available on a regional or local level. Raising finance by issuing shares may be another option to consider.

Whatever form of finance is offered, the lender will always require some form of security. However the level of security sought may vary — beware if the lender asking for unreasonable guarantees. Most bank loans and overdrafts are secured by way of a fixed charge over land and buildings with floating charges over other assets of the company such as stock and debtors.

For some businesses, little security may be available because of insufficient assets. Consequently the security will be given in the form of personal guarantees. Take extreme care before signing these guarantees as they can be difficult to amend at a later stage and many have suffered as a consequence. In particular, personal guarantees are best if they are limited by time or amount. Unlimited guarantees are the most dangerous.

It may be also possible to use other assets as collateral such as life insurance policies or by taking a second mortgage over your home. Whatever the means of security pledged, it should be carefully considered and advice sought.

While the advice given in this article is sound, some generalisations apply. I individual circumstances require specific consideration and time invested in formulating a funding strategy, whilst not guaranteeing success, will provide a structure to guide the growing business. Wherever possible, seek professional advice and help on this. Your business adviser or accountant should be able to assist you in formulating a business plan and obtaining any necessary finance. The message is, plan and be prepared in order to avoid problems later on.

Watch the video featuring Paul Hepburn, Financial Accountant at Sage discussing VAT and good sources of finance advice.

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