How To Finance Business Growth – Part 4

You may need finance to grow your business – to take on staff, upgrade equipment, develop new products or run marketing campaigns.

Use our blog series to explore options for financing growth, and to understand the advantages and disadvantages of each method.

Part 4: Invoice Finance

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Invoice Finance is a way to unleash cash quickly, advanced against the collateral value of your unpaid invoices (accounts receivable).

Rather than wait 30 – 120 days for your customers to pay, you receive up to 90% of the money within 48 hours of raising the eligible invoice, and the rest when the customer pays, less fees and interest.

The Invoice Finance provider (Factor) decides which invoices they advance against, and up to what percentages.

For further information see https://www.finder.com/uk/invoice-financing

 

There are two types of Invoice Finance:

Invoice Factoring

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The financier buys the unpaid invoices and collects the debts from customers (more expensive).

 

Invoice Discounting

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The financier lends money against invoices, which remain owned by the business, who collect the debts (less expensive and confidential from customers).

 

Advantages of Invoice Finance

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  • Instant payment against sales invoices
  • Improved cashflow
  • Easier and quicker to obtain than business loans
  • Financier lends against strength of the invoices, not the credit score of business being financed
  • Typically more and cheaper funds than with a business overdraft
  • Free up time from credit control
  • Finance expands and contracts with a business’ sales ledger
  • Less expensive than equity investors
  • Professional debt collection can speed up customer payment times

 

Disadvantages of Invoice Finance

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  • More expensive than bank loans
  • May be 12 – 24 month tie-in
  • Could impact additional borrowing requests
  • Business may only be offered factoring not invoice discounting
  • Factors may collect all invoices
  • Credit insurance may be required
  • Third party invoice collection may affect customer relationships
  • Inflexible if financier pre-arranges number of invoices bought
  • Factors may limit concentration of invoices paid in some industries
  • Factors may take back their money or add fees if customers don’t pay

For further information see https://www.simplybusiness.co.uk/finance/invoice-discounting/

 

Eligibility

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A company with powerful customers requiring long credit terms, or a business with high stock costs for good orders may find Invoice Finance useful.

Invoice finance companies usually fund business-to-business product suppliers. If you provide business-to-consumer ongoing services you are unlikely to be eligible.

New and established businesses can be eligible, but some financiers have a minimum trading time of 6 – 12 months.

If you export and invoices are paid by overseas clients, some companies will not assist or add conditions.

Some providers have specialist solutions for particular industries, such as recruitment, manufacturing, printing and transport.

For Invoice Finance providers see https://smallbusinessprices.co.uk/invoice-finance/.

 

Costs

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Invoice finance costs differ according to invoice value, business size, and perceived risk.

Fees vary – there is often a service charge, a discounting fee, interest, and additional fees for credit protection, or early contract termination.

For further information see https://www.google.com/amp/s/www.businessexpert.co.uk/invoice-finance/factoring/amp/

 

Alternatives

Both these methods allow businesses control of their cash flow, without the traditional obligations of discounting the entire debtor ledger and lengthy lock-in periods.

Invoice Trading (peer-to-peer lending)

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A newer version of invoice finance uses an online platform to sell invoices to individuals or groups.

You decide which invoices to sell, they are quickly verified and sold to multiple investors.

Because investors are global, invoices to overseas customers from export can be funded.

 

Spot Factoring 

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Also known as single invoice factoring or selective invoice discounting.

This allows businesses to sell one large invoice to fund cashflow.

It can be significantly more expensive than traditional factoring, and can take time to set up with a new Factor.

For further information see https://www.marketinvoice.com/business-finance/what-is-invoice-trading.

 

 

 

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How To Finance Business Growth – Part 3

You may need finance to grow your business – to purchase vehicles, move to better premises, launch an innovative product or enter a new market.

Use our blog series to understand your funding options and the advantages and disadvantages of each method.

Part 3: Asset Finance

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Asset Finance is a well-established, flexible method of financing the purchase or rental of assets such as machinery and vehicles.

It is available to new and existing businesses with any legal structure, and is also known as Machinery Finance, Equipment Finance, Hire Purchase, Operating Lease, Finance Lease, Refinance or Contract Hire.

The amount financed can be from £1,000 – £10M for 1-7 years, depending on the usable life of the asset.

Usually an asset finance provider buys the equipment and the business leases or rents it, making regular payments for an agreed term. The financier insures and maintains the asset over its lifespan.

The amount needed, security type and business track record will influence the term, conditions, interest rate, fees, and which Asset Finance provider can assist.

It is usually important the business demonstrates it can afford the regular payments.

 

Advantages of Asset Finance

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  • Quickly raise funds to get equipment, if you cannot afford to buy outright or want to spread cost over its lifespan
  • Reduce upfront costs of large capital purchases, meaning cash available for other purposes
  • Release cash for growth opportunities whilst retaining use of the asset via Sale & Leaseback
  • Often no additional security required except the asset being financed
  • The interest rate is sometimes  better than that of a business loan
  • Avoids depreciation – many assets such as vehicles, IT equipment and industrial machinery lose value and their security worth rapidly
  • No unexpected costs as the asset finance provider is often responsible for asset maintenance
  • Additional credit line to avoid extending an overdraft or loan
  • Sometimes a fixed rate is agreed to assist budgeting, or a tailored package to suit the business
  • Certain equipment, machinery and vehicles obtained through asset financing qualify for capital allowances, giving some tax relief against profits

 

Disadvantages of Asset Finance

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  • Lack of ownership as the financier retains the asset, although may agree buyout at term end
  • Can be more expensive than buying the asset outright
  • A deposit is often required
  • Not short-term finance, it is structured over at least 12 months and may be hard to cancel
  • Maintenance costs covered might exclude Accidental damage, so the business may pay for repairs
  • Some assets obtained through Asset Finance are not deductable for tax relief on profits

 

Types of Asset Finance

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Hire Purchase

The business leases an asset from an asset finance provider, who purchases the asset and owns, insures and maintains it throughout the leasing period.

The business pays a sizeable deposit then makes regular payments to use the asset, and ownership transfers to the business at the end of the leasing period for a small fee.

VAT is claimed back in the usual way.

Flexible payment plans such as a final “balloon” payment enable businesses to maximise cashflow through reduced monthly payments. This final large payment is based on the residual asset value at the end of the leasing period.

Finance Lease

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The asset finance provider purchases an asset which the business leases over a fixed period, making regular payments to use the asset.

A lower deposit is required than for Hire Purchase.

VAT is charged with each rental, and is reclaimed as payments are made.

The asset finance provider sells the asset at the end of the leasing period, the business and provider may share the proceeds.

 

The business owns the asset during the leasing period, and is responsible for insurance and maintenance, but does not keep ownership after that, although sometimes this can be arranged for an annual rental fee.

Operating Lease

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The asset finance provider purchases an asset which the business leases over a fixed period, making regular payments to use the asset.

It is useful if a business does not need the asset for all its working life, just to service a contract.

The rental costs are reduced as they are calculated on the asset value over the lease period, not on the full asset value.

The business owns the asset during the leasing period, and is responsible for insurance and maintenance, but does not retain ownership after that.

Contract Hire (Vehicle Asset Finance)

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Exclusively for vehicle leasing, the asset finance provider will source, provide and maintain the vehicles and dispose of them at the end of the leasing period.

The provider can use its network and volume discounts to obtain better prices than the individual business could.

Refinance

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The business sells assets to an asset finance provider who then leases them back to the business for regular payments plus interest.

Refinance enables businesses to quickly raise capital while still being able to use these assets.

It can be useful for cashflow and to allow businesses with adverse/no credit histories to raise funds, as the financier may use asset value not track record.

What Assets can be Financed?

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Physical assets with a high value can be financed if they are considered durable, identifiable, moveable and saleable.

Hard Assets include machinery, vehicles, manufacturing equipment and plant.

Hard Assets are reliable security for financers due to their ongoing value.

Some providers now offer finance on Soft Assets, that traditionally would not have been appropriate for asset finance.

Soft Assets are assets with little second-hand value at the end of the leasing period, such as software, office furniture, CCTV and EPOS systems.

Soft Assets are much riskier security, so asset finance providers need to know the business can afford repayments, and often require additional security such as a director’s guarantee or a cash deposit of up to 20% of the asset value.

 

For further information see

 

Consult an Adviser to check which Asset Finance option is best for your business situation and the tax implications.

 

For SEO and blog-writing services contact jan@brilliantbusinessblogs.com or call us on 0745 2086994

How To Finance Business Growth – Part 2

To grow your business you may need to inject cash into it – to purchase machinery, take on sales staff, buy larger amounts of stock, or start exporting.

Use our blog series to understand your funding options and the advantages and disadvantages of each method.

Part 2: Business Loans

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Business loans are a traditional type of finance available to both start-ups and existing businesses seeking to scale up.

The loan amount needed, security available and business track record will influence the loan term, conditions, interest rate and fees.

Also whether it is provided by:

  • High Street Banks and Building Societies
  • Alternative Business Loan companies
  • Individual Investors, or
  • The Government (for start-ups)

For further information see https://www.money.co.uk/business-loans/6-easy-ways-to-get-finance-for-your-business.htm

Advantages of business loans:

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  • A cash lump sum
  • Retain full business ownership
  • Usual loan term of 15 years
  • Sometimes initial 12-24 month capital repayment holiday
  • A fixed rate gives the same monthly payment allowing budgeting
  • A variable rate means monthly payments go up and down depending on Bank base rate

Disadvantages of business loans:

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  • Must pay interest
  • Arrangement fee plus legal fees
  • May require legal charge over property or personal guarantee
  • May need to demonstrate can afford capital & interest repayments
  • Can take a long time to get money
  • May be early repayment penalty
  • Damage credit history if not repaid
  • Must comply with conditions, such as regular financial updates
  • No assistance from investors such as introductions and experience

Considerations:

Loan Amount

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Each loan provider offers different minimum and maximum loan sizes, so options may be reduced for very large (over £250,000) or very small (under £5,000) amounts.

Only borrow what you need, to avoid repaying more than you have to. But ensure you borrow enough to achieve the expansion plans.

For further information see http://viewer.zmags.com/publication/703d32a6#/703d32a6/1

Loan Term

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Loan repayment terms can be short, such as 1 month (a bridging or payday loan) or longer, up to 15 years.

Review the amount you budget will be available for monthly repayments. The longer the loan, the lower the monthly payments but the more interest paid overall. To calculate monthly repayments see https://www.experian.co.uk/business-express/hub/business-tools/business-loan-calculator/.

The exception to this is bridging loans and business cash advances (payday loans), that charge higher fees and interest to offset the short-term nature of their product.

Request an initial interest-only payment period to assist cashflow if it is likely to take some months for additional income to flow into the business from the investment.

Security

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An unsecured business loan is borrowing which does not require security such as a legal charge over your home or business assets. The amount will be limited to around £25,000.

A secured business loan can be secured against different assets, depending on the value and purpose of the loan. Security may include a personal guarantee, security over the asset purchased or over other business assets. Secured loans allow businesses to borrow larger sums of money than unsecured loans.

A peer-to-peer business loan could be considered – the appropriate platform for your business legal structure will need to be used.

For further information see https://www.moneysupermarket.com/business-finance/peertopeerbusinessloans/ and https://www.gocompare.com/loans/business/.

Financial Information

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If you can provide profitable Accounts for the last 3 years, 6 months good bank statements and 3 year projections showing affordability of loan repayments, low-risk traditional lenders are likely to offer you good loan terms.

If not, or if you and/or the business have an adverse credit history, alternative lenders with higher rates and fees may be more likely to assist. Some lenders will accept projections, most will require security.

Usually, the higher the risk a lender perceives you as, the greater the reward (interest & fees) they will need to consider lending to you.

Always shop around – lender appetites and attitudes to risk vary widely. For example, see https://www.knowyourmoney.co.uk/business-loans/ and https://entrepreneurhandbook.co.uk/business-loans/.

If you are a start-up, the government may provide an unsecured loan of up to £25,000 at a favourable interest rate, for up to 5 years, subject to satisfactory information – see https://www.gov.uk/apply-start-up-loan.

Business Plan

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Banks and government agencies will require a detailed business plan that describes your objectives and how you plan to achieve them. It should include descriptions of:

  • business products/services
  • target customers, the market, and competition
  • goals and strategies
  • sales and marketing plans
  • operational plans
  • financial history, forecasts and assumptions
  • skills and experience
  • potential risks and mitigation plans

For a business plan template see https://www.startuploans.co.uk/business-plan-template/. For further information see https://www.gov.uk/write-business-plan.

Team

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Banks and government agencies are particularly judging their risk by assessing the team running the business, as well as the financial information and sector trends.

So if you have lots of experience but know you are weak in one area – say sales – consider strengthening your offering by appointing a well-connected, experienced sales person, subject to obtaining funding.

For further information see https://www.belbin.com/about/belbin-team-roles/.

Advice

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Consult with professional advisers to find the right financing for your business’ needs and understand the tax and legal ramifications.

Find an accountant at https://www.icaew.com/en/about-icaew/find-a-chartered-accountant or https://www.accaglobal.com/uk/en/member/find-an-accountant.html?isocountry=ES.

Find a legal adviser at https://www.gov.uk/find-a-legal-adviser.

 

 

For SEO and blog-writing services contact jan@brilliantbusinessblogs.com or call us on 0745 2086994.

 

How To Finance Business Growth – Part 1

There are many ways to fund business growth – how do you choose the right one for you? Use our blog series to understand your options and the advantages and disadvantages of each method.

Part 1: Clean Up Your House

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Before exploring finance for business growth, it is good sense to check whether you already have access to cash in-house. Review each and every cost for savings, including:

 

1. Staff 

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Employees are a large cost – salaries, benefits, insurance and office space. Keep full-time staff to a minimum and outsource work to contractors or use temporary staff as needed.

Don’t replace leavers immediately – ambitious staff may pick up their duties with encouragement.

Map out a ‘model week’ for each role to ensure staff understand productivity expectations and processes.

Hire sales staff on a basic salary plus commission structure, to motivate them and to tie extra business outgoings to additional income.

Consider where automation can streamline mundane tasks.

Let executives book their own meetings and travel, or use a travel management company to save time and money.

Ask staff to suggest cost cutting ideas and projects. They may have clever ideas from their experience, and it will establish a culture of financial awareness.

Hire smart, inexperienced staff at entry-level salary, who are up-to-date with technology and keen to prove themselves.

Consider cutting down employee hours – some staff may prefer a four-day work week for a better work/life balance.

Other staff may value perks such as home-working, flexible hours, 2 unpaid days off per month, free social events, shared Spotify and Netflix accounts, employee discounts. This can lead to improved employee engagement and productivity, whilst reducing office overheads.

Retain high performers. Although it means investment in people, it avoids the cost and time of hiring and training new people and possible negative effects on team culture and energy.

Consider offering small amounts of equity to valuable employees to enhance their remuneration packages.This also promotes loyalty and aligns their interests with business success.

Identify peak times in business and cover them with parents seeking a few hours work during school hours.

Job posting sites and recruitment agencies are expensive and swamp you with applicants. Instead, post jobs on your social media channels and local university career centre portals

Cross-train staff to reduce boredom from repetitive tasks and add flexibility to your operation.

For simple admin tasks approach local career centres and colleges for students looking for internships to gain work experience. You might discover a gem!

 

2. Power

Continue reading How To Finance Business Growth – Part 1

How To Develop Resilience in Business

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Business can seem a never-ending path of challenges and roadblocks. But you can decide how you frame setbacks, and your choice can help you succeed.

So how do you develop resilience and harness it for business growth?

Continue reading How To Develop Resilience in Business

The Book That Stayed With Me Through 2018

We read or skim lots of books and articles in a year. What do we take away from them to improve our life?

This is the book that stayed with me throughout 2018:

 

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The book gives a morning routine of 6 key actions called “Life S.A.V.E.R.S” – silence, affirmations, visualisation, exercise, reading and scribing – to help you live your best life.

 

1. Silence

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Wake up in the morning, sit in peaceful Silence. Breathe deeply, appreciate the moment, foster gratitude, relax the body, developing a deep sense of purpose.

 

2. Affirmations

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Read aloud daily Affirmations to reconfirm your unlimited potential and most important priorities, increasing levels of motivation, energy and confidence.

 

3. Visualization

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Visualize easily accomplishing the day’s goals, what it will look and feel like. Visualize the day going perfectly, enjoying work and family, and experience the joy of what you will achieve.

 

4. Scribing

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Write down what you’re grateful for, proud of, and what you are committed to delivering today, creating an empowered and inspired state of mind.

 

5. Reading

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Read a self-help book and learn a new idea to implement into the day. Discover something that can be used for improvement.

 

6. Exercise

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Exercise, increase the heart rate, get energised and awake, increasing ability to be alert and to focus.

 

For advice and help with SEO and blog writing services, contact jan@brilliantbusinessblogs.com or call us on 0745 2086994.

 

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