Business Funding – Overdrafts and Loans? Think again!
When businesses think business funding, they think overdrafts and loans. Despite the growth of the alternative finance market, many business owners are still unaware of the options available to them. Their first port of call is the bank and so will be steered down the path towards the bank product of the day. With challenging times ahead, making sure business has access to the best funding solution for their needs is critical. Callan Jones of specialist commercial finance advisory firm, Simple Secure Finance explains the options available to firms looking to secure funding in todays’ climes.
Most businesses are well versed with the traditional overdrafts and secured loans – the main stay of the traditional banking sector, so let’s look at the less popular finance options:
Unsecured Business Loans
Unsecured business loans are a form of finance which do not require a business asset as collateral against the loan. Due to the fact that assets do not need to be valued, unsecured business loans are a feasible solution for businesses who need funding fast, as the application process is usually quicker than their secured counterpart. Unsecured business loans are a viable option for any business with over six months’ trading history looking for relief on cash flow, or to cover the cost of new stock or equipment. they’re also ideal for small businesses who don’t own many assets and need access to a fixed amount of funding fast.
Although the upfront costs may seem lower, unsecured business loans usually cost more than secured loans overall, due to the higher risk for the lender. There are also stricter limits on loan amounts due to their unsecured nature. Some lenders will also ask for personal guarantees from business owners to pay off the loan in case the business defaults on payments. As there is no need to value assets, and the legal process for unsecured business loans is generally simpler, funds can be with the business within a matter of days.
Invoice Finance
Invoice finance helps you realise funds from your own assets – unpaid invoices. Once a facility is in place, you can release up to 90% of the total value of invoices within 24 hours of them being raised. The remaining 10% will be paid to the business once the customer pays their invoice. It’s one of the fastest ways to access working capital.
It’s a really good option for businesses who trade with other businesses on credit terms and are looking to improve cashflow. It is a popular option for sectors with inherent late payment issues, where you are at the end of the chain to get paid and you have lengthy credit terms. It’s also a very accommodating form of finance – if you have a poor credit score or your company is not financially healthy, invoice financiers will be more than happy to help as they secure their funding against the invoice you raise. So as long as your customer is credit worthy and your supplying goods or services which are trackable, they will provide a facility in most cases.
There are two types of invoice finance depending on the size of your business:
Invoice discounting which is a finance only option and involves customers paying you directly but into a trust account owned by the invoice finance company.
Factoring which is a finance and collections solution, where your invoice will make it clear that your customer is paying the invoice financier directly. They will also carry out credit control processes to chase payments.
Asset Finance
Asset Finance is designed to make the purchase of assets, such as a car or piece of business equipment, more affordable. It allows a business to spread the cost of the asset over an agreed period of time, with the loan being repaid in monthly instalments as opposed to a lump sum. It helps businesses access assets which they may not be able to afford spread the cost over a long period of time typically 3 -5 years, whilst maintaining cashflow in the business. With flexible payment terms and deposits, it’s an excellent way of investing in vital assets. You should note that with interest charged on the loan it makes the overall payment higher than the original price of the asset.
There are different types of asset finance available dependent on the asset and whether you want to own the asset at the end of the contract.
Finance Lease – you have the option to buy the asset at the end of the contract, return it or enter a second lease agreement – normally for larger assets
Hire Purchase –the asset is purchased by the funder on your behalf and you pay monthly rental fee. At the end of the contract you can keep it or give it back.
Operating Lease – an off-balance sheet form of funding where you lease it for a defined period of time and return it to the lessor at the end of that time.
Trade Finance
For some businesses funding the gap between paying your suppliers and receiving payment from your customer can be challenging especially if you are importing from overseas. Obtaining credit can be difficult to obtain putting your ability to buy goods to fulfil a customer order in jeopardy. And if you have the spare working capital to pay for the goods upfront it can be frustrating then waiting for payment from you customers.
With a trade finance facility, the funder will make the payments directly to your UK or overseas supplier based on order documentation essentially bridging that funding gap.
Merchant Cash Advances
A merchant cash advance, or business cash advance, is an unsecured finance option based on a company’s credit card sales. It involves a business selling a percentage of future card sales to the provider, with agreed repayments and interest taken from live card sales. It is commonly used in businesses that take a high amount of their sales through card terminals, such as retailers or restaurants. The repayment model allows a business to tie repayments to actual sales, meaning that if trade slows, repayments will fall and be easier to meet. Companies who receive a high percentage of their sales in cash won’t benefit, as the finance amount that is approved is directly correlated to card payments.
Providers can also be quite restrictive with their terms, including ensuring you don’t interfere with card sales by offering cash discounts or closing your business for more than a set number of days. Moreover, because your business trade will fluctuate, it’s difficult to track future repayments compared to other loan types. Merchant cash advances can be set up in a few days but is also one of the more expensive forms of funding.
Revolving credit facility
Similar to a bank overdraft but without a bank account! A revolving credit facility is a short-term facility that you can use when you need it. You’ll get a pre-agreed credit limit, which is the maximum amount you can have outstanding at any one time. The facility will sit there and you use it when you need to. You only pay for what funds you use and the length of time you have had them for. You can manage the balance by making payments into the account.
This type of facility is best used to manage cashflow gaps as opposed to a long-term funding solution. There’s no need to tie yourself into a fixed-term agreement, but you know the money is there if you need it. Many of the leading providers of revolving credit facilities use automated credit decisions to make credit decisions almost instantly. Facilities can be set up in a few minutes so if speed is of the essence. Beware though as annual interest rates for revolving credit facilities can be quite high.
A concluding thought
Finding the right type of finance can be a minefield from the jargon, the pricing structure to how each product works. To add to the mix is the funder you choose – the traditional bank or an alternative funder. Choosing the right funder and right funding solution is not as easy as you might think and finding the right match for you and your business is critical to ensure a smooth-running facility.
Simple Secure Finance has many years of experience of providing the very best commercial finance advice. Experience built up by working with all parts of the market and our knowledge of the products and funders is not easily surpassed. We hold ourselves to account to find the right solution for our clients. As Louise Roberts of Aztec, says: “Simple Secure Finance knew our business, what our issues were and what we wanted from a funder. They presented a few recommendations and it was nerve wrecking as these finance companies were not from the traditional banking names that we all know. However, we have built up a relationship with Simple Secure Finance over the years and we trust Callan. He doesn’t recommend people he doesn’t trust and he stands by his recommendations that the funders he puts forward will be the right funder for our business. It’s not just about a finance facility, it’s about finding a funder who will work with us in the way we like to work”.
So when it comes to business funding – think again!