How To Finance Business Growth – Part 10

You may require funding to grow your business – to buy more stock, take on additional storage, develop new product lines or ramp up your export trade.

In the final instalment of our blog series we outline a number of alternative options for financing growth.

Part 10: Merchant Cash Advances; Trade Finance; Stock Finance; Supply Chain Finance; Structured Finance

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Whilst some of the alternative finance options below can be fast and flexible, a number are bespoke solutions and therefore the costs involved require a certain turnover level to be beneficial.

Professional advice should be taken to understand which products are suitable for your business needs at the time.

1. Merchant Cash Advances

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Merchant Cash Advances are provided by finance companies and card payment companies.

Cash Advances are different to loans as one flat fee is charged, with no interest or other fees. Repayment is a fixed percentage deducted from future card takings, so is flexible according to monthly sales.

It provides quick, unsecured, temporary  (up to 12 months) capital, based on credit and debit card revenue over past months, for any purpose.

Typically, providers offer up to 100% of average monthly card takings, some offer more.

A minimum monthly card turnover is required.

For further information see

2. Trade Finance

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Trade finance is used to facilitate domestic and international trade.

In International business and industries such as Construction, Manufacturing and Transportation, the time between purchasing and selling on receivables can be lengthy.

This creates risks for suppliers needing payment assurance, and for importers and buyers requiring proof of dispatch/work and finance to pay suppliers before these assets have generated cash.

Trade finance manages these cycles, providing flexible lines of credit with long repayment terms, enabling companies to confidently start new trade ventures.

Types of Trade Finance

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Trade finance tools facilitate payments between buyers and sellers at different points in the trade cycle to ensure trustworthy, secure transactions.

The amount, cost and terms of finance depend on financiers’ perceived risk.

Banks generally have a lower risk appetite than non-bank lenders, and require property or equity as security.

Non-bank specialists provide diverse funding sources with more flexible terms and less tangible securities (such as purchase orders).

For further information see https://www.export.org.uk/page/Methods_of_Payment and https://www.great.gov.uk/advice/manage-payment-for-export-orders/payment-methods-for-exporters/

Purchase Order Financing

Provides businesses with working capital to fulfil large purchase orders – including paying suppliers – made by buyers who insist on credit terms.

It is repaid when the buyer pays the invoice for that receivable.

Unlike Factoring/Invoice Discounting (see https://brilliantbusinessblogs.com/2019/01/31/how-to-finance-business-growth-invoice-finance/) PO financing advances up to 100% against confirmed orders before an invoice is generated.

For further information see https://www.google.com/amp/s/www.businessexpert.co.uk/invoice-finance/difference-purchase-order-capital-working-capital/amp/

Letters of Credit

Trade financiers guarantee to pay suppliers’ banks on behalf of the buyers, once key export documentation (such as a bill of lading) are provided or conditions are fulfilled.

Bank Guarantees

Financiers guarantee payment to suppliers when key contractual obligations (such as the dispatching of goods) are met.

Performance Bonds

Financiers pay suppliers as bonds mature when trade terms are achieved. Often used in construction projects.

For detailed Trade Finance information see https://www.export.org.uk/page/TradeFinanceGuide and https://www.bibbyfinancialservices.com/funding/invoice-finance-products/construction-finance

3. Stock Finance

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Stock financing allows manufacturers and distributors, such as the automotive industry, to finance product supply.

The financier agrees a credit limit with an approved dealer, and the vendor receives guaranteed timely payments to stock products via this one source.

For further information see https://www.hitachicapital.co.uk/business-finance/introducers/stock-financing/

Stock Finance differs from traditional working capital funding, Invoice Finance and Trade Finance, as it relates to the purchase of goods to sell on, which are not yet confirmed orders.

It can be used cross-border and domestically to finance buffer stock. Or employed in an industry not suited to trade finance, for example, when selling to individual consumers online.

For further information see https://www.tradefinanceglobal.com/finance-products/stock-finance/what-is-stock-finance/

4. Supply Chain Finance

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Supply Chain Finance is powerful, when used well, in unlocking working capital trapped in supply chains. It is also known as Supplier Finance or Reverse Factoring.

It allows businesses to pay suppliers early for an early settlement discount.

Alternatively, it is used to pay suppliers on usual terms but extend creditor days, by repaying the facility at a later date.

5. Structured Finance

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Structured finance provides major borrowers with an alternative, unique source of financing when traditional options are not suitable.

Structured finance involves complex,  bespoke financial instruments (securities) created by combining individual ventures/receivables/assets to mitigate risk, for investment by investors with appropriate risk/return appetites.

Several products can be used to achieve the financing needs of large borrowers.

Structured finance products include: Syndicated loans, Collateralised Bond Obligations, Credit Default Swaps, Hybrid Securities and Collateralised Debt Obligations.

For further information see https://corporatefinanceinstitute.com/resources/knowledge/finance/structured-finance/

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How To Finance Business Growth – Part 9

You may need finance to grow your business – purchase machinery, recruit staff, research new delivery channels or step up to the next level.

Use our blog series to understand your choices for funding growth, and the advantages and disadvantages of each option.

Part 9: Equity Investment

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Equity Finance is where new or existing companies raise money by selling part of their business to an investor.

Advantages of Equity Finance

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  • No monthly capital and interest repayments
  • Benefit from Investor’s experience and contacts
  • Risk shared with Investor
  • Large amounts raised over several ’rounds’ to fuel fast growth

Disadvantages of Equity Finance:

Continue reading How To Finance Business Growth – Part 9

How to Finance Business Growth – Part 8

It is important to understand the many ways to fund business growth, so you can choose the most suitable ones for your situation.

Use our blog series to discover your options, and read the advantages and disadvantages of each financing method.

Part 8: Crowdfunding

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Crowdfunding has recently become a popular way to fund business growth, via an online platform. It can be useful for new and existing enterprises.

Crowdfunding involves persuading a large amount of people to put a small amount of money into your business for a specific purpose.

The funds may or may not need to be repaid, and investors may or may not require a share of your company.

For further information see https://www.ukcfa.org.uk or watch their video here:

Advantages of Crowdfunding

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  • Access capital from investors, customers or lenders quickly
  • Business may keep the money
  • May keep ownership of business
  • May repay less of the investment than with traditional loans
  • PR for your business
  • Some types less regulated
  • May obtain a better interest rate
  • Obtain feedback on your product from lots of investors
  • Develop loyal customers

Disadvantages of Crowdfunding

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  • Have to offer incentives
  • No guarantee project is funded
  • Successful campaigns take time, effort and money, so slower than some traditional forms of funding
  • Usually get nothing if don’t meet target
  • Investors may lose their money
  • Unsuccessful campaign may produce negative PR for you

For further information see https://www.experian.co.uk/business-express/hub/guides/crowdfunding-small-businesses/.

Types of Crowdfunding:

Donation Crowdfunding

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People donate money because they believe in a cause, and do not expect repayment or any reward in return.

Example platforms for donation crowdfunding include JustGiving and
Kickstarter.

 

Reward-Based Crowdfunding

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Raise funds online by pitching your product idea and offering rewards to investors if your target is achieved.

Rewards are not equal to finance invested, but may be unique or sought-after, such as T-shirts, club membership, dinner with the founder, or Launch invites.

Attractive ideas and rewards are needed to secure money. For example, fans contributing towards creating a new console game and getting a pre-release copy, or a name credit.

Example platforms for reward crowdfunding include Kickstarter and Indiegogo.

 

Debt Crowdfunding

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Most similar to a traditional loan – investors should be repaid their money plus interest, often on a monthly basis.

Also called Peer to Peer lending – it can be more risky for lenders, although there are regulations to protect them.

Example platforms for debt crowdfunding include Funding Circle, Ratesetter and Zopa.

Minimum investment £20, minimum loan £5000, maximum loan £250,000.

 

Equity Crowdfunding

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Investors receive shares (equity) in the business in return for financial investment. Also known as Seed Capital.

Example platforms for equity crowdfunding include CrowdCube and
Seedrs.

Minimum individual investment £10, minimum investment raised £10,000, no maximum amount raised.

These platforms allow individuals to invest in companies in a way that was previously impossible. Additionally they offer better access to business angels, venture capitalists and syndicates.

Equity investors require detailed information about the business – its motivations, projections, people and strategy.

For more information see: https//entrepreneurhandbook.co.uk/crowdfunding/

How To Succeed At Crowdfunding

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1. Research how much – and for what purpose – other businesses have raised. Gain actionable insights from similar projects into what succeeds.

2. Establish a professional website to demonstrate credibility to investors. Clearly state your proposal and encourage e-mail sign-ups for updates.

3. Start your campaign early – create a lead database, build an e-mail list, bond with your audience, and promote your project to your community.

Search for blogs, influencers and news channels that covered projects similar to yours, to generate a relevant outreach list.

4. Create a compelling story – people tend to use emotion to decide whether to invest. Providing background details and reason for the product helps.

5. Produce a high quality video to bring your campaign to life. For advice see https://brilliantbusinessblogs.com/2018/11/08/video-marketing-what-to-post/amp/.

6. Drive relevant traffic to your landing page by issuing press releases, link-building, reaching out to influencers, sending e-mails and writing blogs.

Using social media contacts and networks to spread the word and build traction is essential.

7. Personalise your outreach message and channels to be attractive to your particular niche, not a mainstream audience, to maximise conversion rates.

Successful campaigns typically have less than 1000 backers. Find individuals passionate about your creation.

8. The first week is crucial – experts say raising 25 – 40% of the overall goal in the first week greatly improves your chances of raising the rest.

9. Maintain timely, high-quality and honest interactions with stakeholders before, during and after your campaign.

A successful crowdfunding campaign will have at least four updates. Experts agree engaging with followers on a regular basis raises substantially more money than no updates.

Examples include: ‘We made it to 30% – Thank You!’;  product development progress; productive meeting updates;  new information about the product; images, graphics or videos.

As well as your website and social media, re-engage your outreach list, niche forums and industry influencers with follow-up news.

Sample List of Crowdfunding Platforms

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Check online for the latest platforms and terms before crowdfunding.

Seedrs – equity fundraising for startups. Similar platforms include Fundable, SeedInvest and Seedups.

Crowdcube – one of the largest equity-based and loan platforms for startups.

Crowdfunder – reward-based funding for individual projects.

Fundit.Buzz – reward/equity funding social ventures, for businesses, groups and individuals.

SyndicateRoom – Equity funding for businesses.
Indiegogo –the world’s biggest crowdfunding site. Can raise funds for almost any purpose.
LendInvest – lending platform for mortgages and property loans.
Funding Circle – debt crowdfunder  for small businesses.
Trillion Fund – funds environmental and social projects.
Unbound – digital publishing platform for funding authors’ works.Similar platforms include Readership and Pubslush.
RateSetter – business lending platform.
Angel List – debt and equity for start- ups.
Angel’s Den – debt, equity and donation platform for any business stage.
Kickstarter – reward-based arts and music creative project funding. Also for tech and service-based businesses.For further information see https://www.growthbusiness.co.uk/top-10-crowdfunding-platforms-for-business-finance-2483726/.

Considerations

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Different crowdfunding platforms can fund different business legal structures.

Usually crowdfunding is easier and quicker than traditional lending and investment products.

Typically the crowdfunding platform takes an upfront fee or a percentage of the total raised, or both.

The Financial Conduct Authority (FCA)  largely regulates crowdfunding. Most major platforms are members of the UK Crowdfunding Association (UKCFA), with a voluntary code of conduct.

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How To Finance Business Growth – Part 7

You may need access to funding to grow your business – to buy equipment, employ staff or cover marketing costs.

Use our blog series to learn about the finance options available and the advantages and disadvantages of each method.

Part 7: Grants (Non-Repayable Finance)

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Grants are funding given by government and organisations to support new and existing businesses in certain economic sectors or localities.

For example, start-ups in an economically deprived area; businesses addressing under-representation of minority groups in a sector; or companies tackling green issues.

Grants range in size from £100 to £500,000 and more. Usually, the larger the grant, the more complex the application process is.

Each UK grant has different criteria for businesses they will fund. These change quickly so be sure to check their websites for latest offerings.

Advantages of Grants

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  • Do not have to repay the funds
  • Keep ownership of your business
  • Non-monetary support such as expertise, offices and resources

Disadvantages of Grants

Continue reading How To Finance Business Growth – Part 7

How To Finance Business Growth – Part 6

Sometimes you need to access additional funds to grow your business – to obtain new materials, expand production lines or purchase vehicles.

Use our blog series to understand the methods of financing business growth, and the advantages and disadvantages of each option.

Part 6: Business Credit Cards

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A business credit card allows purchases to be made in the same way as using a personal credit card.

Some companies prefer having an expenses system or making payments only with money received in.

However, business credit cards can be useful to cover day to day expenses, and can be issued to staff, such as sales executives, for networking and business development meetings.

Advantages

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  • Can be issued to multiple staff
  • Keep ownership of your business
  • Often unsecured
  • Offer incentives such as 0% interest, air miles, cashback, insurance, rewards, discounts
  • Itemised billing for monitoring and controlling cashflow
  • Manage different expenses for company and employees
  • Separate business and personal expenses
  • Eliminate expense claims
  • Build a business credit profile
  • Fraud protection and insurance options
  • Up to 56 days interest-free credit
  • Easier to use online or by phone
  • Convenient for travel abroad
  • Eliminates the need for petty cash

Disadvantages

Continue reading How To Finance Business Growth – Part 6

How To Finance Business Growth – Part 5

You might need finance to grow your business – to expand the workforce, purchase essential equipment, or buy stock for new orders.

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

Part 5: Overdrafts

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A business overdraft is an arranged current account facility for established businesses who need flexible borrowing for a short time.

Overdrafts can be used for working capital to cover unexpected costs or payment delays.

Borrowing occurs when payments out of an account exceed the available balance. An arrangement fee plus interest is charged, and security may be required.

Overdrafts are a common way of financing businesses with fluctuating finance requirements. They are provided for an agreed time period.

 

Advantages of business overdrafts

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  • Flexible borrowing & repayments
  • Keep ownership of busines
  • Suitable for short-term borrowing
  • Easy and quick to arrange, with immediate access to funds
  • Usually no charge for early repayment
  • Amount tailored to business cashflow needs
  • Suitable when it is difficult to assess funding amount needed
  • Interest paid only on overdrawn balance
  • Interest and fees normally tax deductible

Disadvantages of business overdrafts

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  • Pay interest
  • Tends to be for smaller sums
  • Arrangement fee plus legal fees
  • May need Security eg legal charge over property, personal guarantee
  • Must comply with conditions, such as covenants, monthly management accounts, projections
  • Repayable on demand, unlikely unless financial difficulties

For further information see

Continue reading How To Finance Business Growth – Part 5

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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