Firstly, why do you need the funding? Is it for business growth – to buy new equipment for example? Or do you have a cash pinch point because of an underlying problem? Perhaps you have a vat bill looming, but are worried about having the cash to cover it because some of your customers are late paying. It might be a one off, or it could be a symptom of an underlying problem such as poor credit control. Fixing the issue might not help you with the immediate problem, but it could stop the pinch point happening again.
That aside, there are many different types of funding with different attributes and suitability for different purposes.
In years gone by, the traditional source of funding was through your high street bank in the form of an overdraft or loan. Times have changed and if you have a business banking relationship with your bank, rather than a corporate banking one, then you probably won’t have a business manager that you can pick up the phone to and ask about funding. (A couple of exceptions we know of to this rule are Allica bank, who still have someone you can phone and who can give you advice! Handelsbanken also have dedicated relationship managers, although they are selective about who they accept as customers).
Borrowing options
Traditional loans and credit
| What | Best used for |
|---|---|
| Term loans | Long term investments such as purchasing equipment, expansion or refinancing debt. Using a term loan for business expansion can help you generate extra profits which allow you to pay the debt back and cover the interest costs during the term of the loan. |
| Business overdraft | Ideal for short-term cash flow issues, or where your business is seasonal and you have periods where sales are lower. Its advantage is that you only pay interest on what you use, so for short term periods this is a better option than a term loan where you would be paying interest for the term of the loan. |
| Business credit cards | Useful for small, frequent expenses, travel costs and subscriptions. Your credit card limit may be included in your overall facility limit. |
Asset based lending
| What | Best used for |
|---|---|
| Invoice Discounting and Factoring | Getting access to cash tied up in unpaid customer invoices. This can be useful where your customers have extended payment terms. It is common in recruitment companies that run contractors. Often they have to pay contractor wages, before receiving the corresponding income from their customers. The downside is that it’s not particularly suitable where your business has peaks and troughs in invoicing, as it relies on drawing cash against invoices. An overdraft may be a better option in these cases. What’s the difference between factoring and discounting? In factoring the lender manages credit control and collections. In discounting you retain credit control but the lender issues you advances against the invoices. |
| Asset finance – Leasing and Hire Purchase | Businesses acquiring vehicles, machinery or other equipment without a large upfront cost. The advantages are that if security is taken, it is against the purchased asset, whereas a term loan may require a wider security. (Read on for an explanation of what security is). |
| Stock finance | Businesses that purchase inventory in advance of peak sales periods. It can also be used to help finance “expensive” stock such as large pieces of equipment. |
Short-term and alternative lending
| What | Best used for |
|---|---|
| Merchant cash advances | Businesses with strong card sales e.g. retail and hospitality. Offers quick, flexible funding based on future revenue. You pay it back as a percentage of future card sales. In our experience it is relatively expensive, so an overdraft could be a better option if you can secure one. |
| Revenue based financing | Businesses with fluctuating income. Repayments are based on a percentage of monthly revenue. |
| Selective invoice discounting | In traditional invoice discounting the lender wants the whole debtor’s ledger to be included. Some new lenders will let you work on an invoice by invoice (spot) basis, so that you don’t have to apply it to the whole sales ledger. |
| Tax funding | Funding your tax payments e.g. vat or corporation tax where you do not have sufficient funds to make the payment. This is generally short term funding for periods of 3 months to a year. This should be in place before the tax is due – many lenders won’t fund overdue amounts. You can also try getting a time to pay arrangement with HMRC. |
Government and specialist loans
There are sources that may have eligibility criteria such as age and geography. If you are a Scottish Business it is worth checking out this site Find business support in Scotland | Find Business Support. Support offers can change regularly so sign up to their newsletter to keep up to date.
| What | Best used for |
|---|---|
| Princes Youth Business Trust | Offers loans for young people who are starting and growing businesses. Eligibility age 18-25 (30 in some instances). |
| Princes Youth Business Trust | This is a government backed scheme which provides the lender with a 70% government backed guarantee. This is to help support smaller businesses with access to finance, which they may not be able to access without the government guarantee, or access to funding at a better rate. It is administered through accredited lenders. Just because the guarantee is there, you still need a viable lending case and for your business not to be in difficulty. |
What does it mean when it says “no security required”?
This means that you are not having to provide security to the lender. In practice, security is something valuable that the borrower promises to give to the lender if they default on the debt. This allows the lender to recover some or all of the amount owed to them. For instance, a loan to buy a property will often be secured against that property. This is done by the lender taking a charge on the property.
So, “no security” will mean that you don’t have to pledge your house, or other assets. But it doesn’t mean that the lender won’t ask you for a personal guarantee.
A personal guarantee means you’ve promised to pay the amount the business can’t pay, capped at the level the guarantee is set at. For instance, if the business can’t afford to pay a debt of £150,000 and you have provided a personal guarantee for £100,000 then you would need to pay £100,000. In some circumstances this could mean that your home is at risk, although the personal guarantee can be paid from other cash or assets which you own.
Where should you start?
It’s always worth a call to your bank, as they will often be the cheapest source of funding, if they are willing to lend. Even if you have a good case and your business is trading well, it doesn’t always mean your bank will support you. At different times banks have sectors that they are less keen to support. Or, they change their minds on what sectors they like! In the financial crisis of 2007 / 2008 many banks which supported property developers or businesses involved in property before the crisis, withdrew their funding or refused new funding due to a change in their lending appetite for property based businesses.
Fortunately, even if your bank doesn’t play ball, there are lots of other lenders who may want to fund you, although expect to pay a bit more.
A good place to start your search is on our website Business Funding Advice – Services | One Accounting. You can even start a search yourself from this page using our partnership with Capitalise, an online broker.
We also have links with other brokers, so don’t be shy about giving us a call to discuss what you are looking to achieve. You can reach us on 0131 220 0152.
What will you need?
The information you need to provide will vary by lender. The below list is not exhaustive, but gives you some idea of what you will need to have available for most lenders.
- Your last set of filed year end accounts. If these are more than 12-15 months old, you may have to provide management accounts for the year after your last set of filed accounts.
- Confirmation that the tax payments of your business are up to date – PAYE / corporation tax / Vat.
- Copies of bank statements – the period covered can range from 3 to 12 months.
- Basic company information – Vat number, corporation tax UTR, registered office, company number.
- Details of the directors and shareholders.
- For larger sums such as larger term loans you are likely to have to provide a cash flow forecast which demonstrates why you need the funding.
Make sure that your statutory filings are up to date. We have seen lenders refuse to look at cases because the confirmation statement was overdue.
What next?
The earlier you can identify the need for funding the better. It gives you time to prepare and search out the best deal. Having to find funding at the last minute is stressful and will likely end up with you paying more than you had to.
Give us a call on 0131 220 0152 and we can talk through your requirements. If you don’t have all the accounts information likely to be requested, we can help with that too.
