Make the most of your assets Ian Wilkins, Group Managing Director of Commercial Finance for Aldermore, takes a look at the variety of finance lending options available to SMEs…
There are a number of funding options available to new-start businesses from the more traditional bank-led choices – whether that’s overdrafts or loans – through to the Enterprise Finance Guarantee (EFG) scheme – a government-run lending facility – as well as asset bank lending in the form of invoice finance and potentially asset finance too.
Invoice finance is incredibly well-suited to new-start businesses because, effectively, the facility grows in line with the business’ turnover. With invoice finance, money is lent to a business against their unpaid invoices. So if somebody starts trading on week one, then clearly the amount of invoices they have outstanding will be very, very small but as they win new customers, the amount of money that they’re able to get from those invoices grows in line with the size of the sales ledger and the size of those unpaid invoices. It can be a very helpful avenue for new-start businesses to fund their growth in those early stages. It can help cover regular business outgoings such as:
- Employees wages
- Tax bills
- Supplier payments
- Investment in asset
Although the lender will charge a small percentage of the invoice value as a fee for the finance they have provided, it does mean that in the majority of cases, up to 90% of the invoice value is available to the business in cash within 24-hours. So instead of waiting the traditional 60 to 90 days for payment, the cash is received more or less straightaway.
Factoring is a popular form of invoice finance that is ideal for start-ups. Factoring offers funding but the lender also does the credit control on behalf of the business, chasing customers and any outstanding payments. For a new-start business, there can be a real added value in this form of outsourcing because when running a new-start business, the business owner will be incredibly busy and this takes away the responsibility of credit control from them.
Typically, asset finance is finance provided against a business’ assets, whether that be machinery, stock or vehicles. It is potentially available to new-start businesses but, in this case, lenders would be looking for some form of financial accounts to show trading profits before they put a finance facility in place.
The EFG scheme
The EFG scheme is a government-backed lending product which again is very popular with new-start businesses. Effectively, with the government-backed scheme, the government will guarantee up to 75% of the borrowing and therefore the banks that offer this service are far more likely to provide finance to new businesses without the security that established trading facilities would have, due to the fact that they’ve got the government guarantee that sits behind it.
If you go to a high street bank looking for a traditional loan or overdraft facility, the reality is that they will want security for that borrowing. However, the case for most new-start businesses is that they are unlikely to have sufficient business assets to provide that security. It therefore becomes the responsibility of the director or owner of the business to provide this security through some means, whether this be against property which many business owners may not feel comfortable carrying out.
With invoice discounting, because the security for the facility is taken against the unpaid invoices, the security is provided by the business rather than by the directors, which often proves beneficial for start-ups.
Applying for finance
When businesses come to apply for such finance, it’s important for them to have a business plan so that the lender knows exactly what the business is looking to do; who they’re planning to trade with, as well as simple financial forecasts that cover profit and loss and cash flows. This is to provide comfort to the lender, that with the funding in place that the business is seeking, the business can then stand a reasonable chance of hitting its targets and its goals.
There’s lots of places to go to for free advice, whether that’s on the internet or via a specialist agency or consultancy. It’s important that new businesses don’t feel alone, especially in these early stages; use the advice of experts in order to give yourself the best chance of succeeding in your business venture. There’s a real danger that people just go to their accountant or to their bank manager and get one view on the world, when there’s lots of ways to tackle the issues that SMEs face.
This article was first published in Your Business with James Caan in January 2012.