THE CHALLENGE
In the midst of an era of rising taxes and cutbacks it’s no wonder new businesses are struggling to make ends meet. Whilst there are signs of a recovery, the challenge for new businesses is raising the finance to help their business grow.
BUSINESS PAYMENT SUPPORT SERVICE (BPSS)
On 24th March 2010, the Chancellor announced that the BPSS or Time to Pay (TTP) arrangements would be extended although for large arrears of £1m or more an Independent Business Review will be required. The TTP arrangements is an offering of assistance to businesses to pay their tax bills and includes VAT, PAYE, NIC, Corporation Tax and Income tax (for the self employed). Each repayment plan is tailored to meet the circumstances of the business.
WORKING CAPITAL
We should continue to look at internal liquidity to source finance.
1. Delay investment until absolutely necessary
2. Crank up credit control
3. Pay on time but never early
4. Bring revenue forward
Whilst we are now technically out of the recession, debts will continue to go bad with some sectors bearing the brunt more than others. This could be further exacerbated if banks start to take a closer look at their smaller business loan books.
Bringing revenue forward is often the hardest obstacle to overcome but it can be carefully built into the business model by insisting on up front billing or stage payments. Of course some justification may be required but monthly billing is much easier now with cost effective software like Kashflow and upfront payment has become increasingly the norm with the rise of ecommerce. You have to ask do you really want clients who can’t afford to even put a deposit down.
ENTERPRISE FINANCE GUARANTEE SCHEME (EFGS)
The EFGS has been extended until 31 March 2011. The scheme has been created to support up to £1.3bn of new lending by banks, is open to businesses with a turnover of up to £25m, is designed to enable businesses to secure loans of between £1,000 and £1m, repayable over 10 years. The government guarantees 75% of the loan, with the banks covering the remaining 25%. Most businesses in most sectors are eligible for the scheme and the guarantees are available through the main high street lenders.
SECURED LOAN
Under normal circumstances you would expect a bank loan to be the cheapest source of finance. However, banks are demanding overcautious levels of security coupled with high lending rates. This is principally because banks still evaluate most loans as high risk and have a high degree of uncertainty regarding the underlying business cash flows. Interest rates on Small business loans vary dramatically and currently range from 5.5% to 11%AIR for loans of between £1,000 and £25,000 (as at 22/4/2010). Despite the current drawbacks of this type of funding it still remains one of the most accessible where large sums are required and security is available.
OVERDRAFT
Overdrafts are generally expensive so not normally advised as a long term source of finance. Rates can vary from 7.5% to 11% for a facility between £1,000-£25,000 and there are often hidden and repetitive arrangement fees coupled with the risk that the facility may be withdrawn at short notice. However for those that struggle to get other finance you may have little choice. Useful as a short-term solution to unexpected situations but long-term finance opportunities should be revised at the earliest opportunity.
EQUIPMENT FINANCE
Equipment finance is most commonly provided on purchase and can be raised against anything from a truck to a computer mouse. This is cheaper than the overdraft facilities as the lender is provided with some security and the level of risk is simple to assess. However equipment finance remains relatively expensive owing to a high administrative cost and the added security risks of theft, damage and fall in market value.
INVOICE FINANCE
Income factoring can be offered in several forms and factoring need not include all your clients. The highest service level would include credit control and total default risk whereas the simplest form would be an offering of finance against your debtors listing. Fees start at 1.5% above base rate and should generally only be considered for businesses turning over in excess of £100,000 and the costs should be carefully considered against the cost of employing the services of an accountant or credit controller.
LONG-TERM BUSINESS ANGELS
This form of funding is typically suited to a new company with a big idea or a successful small company looking to expand. Business angels typically see tens of investment opportunities a week which means they get to take their pick. They will often seek to obtain a controlling stake to guarantee their input into the decision making process. This will help reduce their risk exposure but in return will provide access to their extensive knowledge base to help maximise returns. Securing funding can be a project in its own right but solid proposals will attract interest.
FRIENDS, FAMILY & ASSOCIATES
The old adage is not to mix business with pleasure but in the good old days people were successful by doing just that. Many clients have started a business from a loan from a friend but the golden rule applies which is to establish what is expected of each other. It is certainly of value to draw up a loan agreement or in the least set out an agreement of terms.
Longer term investors may require an equity stake which will mean surrendering a portion of your profits. The advantage is that they will also take an active interest in your business and potentially help you on your way.
By: Chris Neophytou
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