How to Raise Finance
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Start Up Finance will be needed for…
- Premises
- Equipment
- Goodwill if purchasing an existing business
- Installation of utilities
- Legal and professional fees
- Stationery
- Advertising and publicity
- Insurance
- Stock for resale
- Wages of employees
Then as you expand, further finance may be necessary to support any of the
above that may increase before you make the sales and get paid. Businesses that
are profitable can go bust if they don’t have the appropriate finance
arrangements in place to deal with expenses that need paying before their
customers pay them.
You may have cash flow difficulties caused perhaps caused by needing working
capital for debtors and stock or seasonal business variations.
You need to try to match the appropriate source of finance for what you are
trying to achieve. Generally, long term finance for long-term investment and
short-term finance for short-term working capital requirements.
How To Get Your Bank To Say “Yes”
Banks are the major source of finance for small business in the UK. When
applying for finance from you bank it helps if you follow these procedures…
- Always produce a business plan. The main areas that need
to be covered in a business plan are…
- The management team background with details of qualifications and
experience.
- The type of business.
- Previous trading history.
- Details of the market in which you are going to trade.
- Likely extent of the competition.
- How you will market your business.
- A cash flow forecast for at least the first 12 months that demonstrates
you can meet the loan repayments and a project profit and loss account and
balance sheet.
- Your break-even point.
- A SWOT analysis of Strengths, Weaknesses, Opportunities and Threats.
- Details of any expert advice you have sought.
- How much you want to borrow and over how long.
- Commitment from the borrower.
- What other sources of finance you will be using.
- Security being offered.
- What savings, investments and other assets you have.
- Produce a 2-page summary of the plan.
- Ask for a 25% longer repayment than you need and
10-20% more money than you need.
- Send the plan to banks with an invitation to visit your premises.
- Prepare before meeting the bank manager. Think of the
questions that are likely to concern him and have your answers prepared.
- Always negotiate the interest rate and terms after
the offer has been made, not before. There is normally an arrangement fee of
at least 1% for bank loans.
- Offer a charge on assets rather than personal guarantees.
- Try to avoid personal guarantees but if you have to give
them ensure they are limited to the amount of the loan.
- Do not agree to too much security – only agree to the bank’s
maximum exposure to loss.
- Get the agreement in writing.
It helps to keep a good relationship with your bank and you can do this by…
- Keeping to agreements made – making payments on time, not
going over your agreed overdraft limit, etc.
- If you are going to go over the limit or default on payment, warn
them in advance.
- If there is bad news, let them know and let them know
what you are doing to do to remedy the situation.
- Supply them with any information they require on time.
- Try to prepare the bank in advance for requests for
additional finance.
- Borrow for the right reasons.
Overdrafts are normally reviewed annually.
Bank Loans may be secured or unsecured. Secured loans are
just like a mortgage with repossession of the secured property possible in the
event of default. The property could be your home. The loan may be used for a
totally different purpose to the property on which it is secured.
The security may be a second charge on the property meaning that another
lender has the first charge and the second lender only has the rights to any
sale proceeds after the lender with the first charge. A lender with a second
charge is therefore likely to charge a higher interest rate as would a lender of
an unsecured loan.
Mortgages are the usual way of financing the purchase of
commercial property with the loan being secured against the property, giving the
mortgage company the right to repossess the property in the event of you
defaulting on mortgage repayments. They tend to be for 10 to 25 years in length.
Small Firms Loan Guarantee Scheme
Where you have insufficient security to satisfy the bank to
qualify for a bank loan, the Government have a scheme whereby they guarantee up
to 85% of the loan up to £250,000 for businesses trading for over two years and
70% of up to £100,000 for other businesses. The lender makes the final decision.
In return for the guarantee, a fee is charged on top of the banks normal
arrangement fees and interest. Loans are available for most business purposes
although there are some exclusions.
Factoring
Factoring is offered by banks and finance houses. The factor buys the debts off
of you, paying you a high percentage such as 80% up front and then the balance
when the customer pays the debt in full. They of course charge a fee for this.
They are likely to charge 2-3% over base and a service charge of between 0.5 –
3% of your turnover, making them a potentially very expensive source of finance.
They can also provide other services such as…
- Taking over the sales ledger administration.
- Assessing credit risks.
- Exporting assistance.
- Invoice Discounting
- Credit protection – for a further fee the factor guarantees 100%
protection against bad debts. This is known as “non recourse”.
Factoring your debts can be a good source of finance for those businesses
that really need the money to help them grow. Viewing them as a finance source
of last resort is probably the best approach to take.
Invoice Discounting is similar to factoring, but all that is
supplied is the finance facility against the invoices. There is no involvement
with the sales ledger administration and the customer does not know the invoices
are being discounted.
Hire Purchase & Leasing
With hire purchase you obtain the goods or equipment and make
repayments (normally monthly) under a hire purchase agreement to cover the cost
of the goods plus interest over a period of time. You own the goods or equipment
once all payments have been made. The interest rate is often higher than for
bank loans.
Leasing
There are two types, purchase leases which are in essence just like hire
purchase and operating leases. With operating leases you pay a rent for the use
of an item and sometimes at the end of the lease there is an option to purchase
the item or extend the lease with a reduced rental. Every lease is different and
you need to look carefully at it. Leasing is available to higher risk cases that
an unsecured loan may be because of the collateral of the equipment.
Trade Credit
Trade credit when you buy from other suppliers is generally an interest
free form of finance unless the supplier is prepared to offer a
discount for payment up front. It therefore makes sense to take advantage of it.
However, always bear in mind good supplier relationships are important to the
success of your business and paying them on time or even in advance will
contribute to this.
Equity Finance
This is not a loan but the person providing the finance becomes a part
owner in the business, who may or may not be involved in the running of
the business. It is important to fully understand the terms of the arrangement
with an equity partner. It could be by giving shares in your Limited Company or
by a partnership arrangement.
Venture Capital
The British Venture Capital Association
www.bvca.co.uk represents
companies offering venture capital. Apart from finance, the venture capital firm
provides strategic supportto the business, often with a seat on the board.
It is generally a higher risk type of investment where the Venture Capitalist
is probably looking for a 300-500% return on their investment over a 4 to 5 year
period. The amounts tend to be for over £100,000. Most investments take the form
of equity capital.
Business Angels
Business Angels are private individuals who invest on their own
or sometimes as part of a syndicate for larger amounts. They rarely have a
connection with the company before they invest but often have experience of its
industry or sector. They look to invest both money and their business expertise.
Business angels usually invest between £10,000 and £250,000 in an investment.
Business angels invest across most industry sectors and stages of business
development, but especially in early and expansion stage businesses. Most prefer
to invest in companies within 100 miles of where they live or work.
The National Business Angels Network is a good starting point to find a
business angel. A list of their full members who can help can be found at:
http://www.bbaa.org.uk/portal/index.php?option=com_contact&catid=19&Itemid=57
Grants
The Department of Trade & Industry
www.dti.gov.uk is often the
best source to find out about grants that may be available to you. Grants are
often available for…
- Assisted geographic areas.
- Exporting.
- Research and development activities.
- Training.
- Business start up support.
About the Author
Jonathan Amponsah BSc FCCA is a UK Tax Expert and the founding partner of
A M P Associates –
A specialist firm of chartered certified accountants and tax advisers based in
London and Surrey. Jonathan advises on a wide range of business and tax issues
and he is recognized for his proactive and innovative approach to taxation.
Jonathan can be contacted on 0845 009 8845 or email:jonathan@ampassociates.co.uk
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Article Published/Sorted/Amended on Scopulus 2008-04-10 09:20:38 in Business Articles
