There’s more to finance than loans and overdraftsby
Whether you’re looking for finance to ensure a business’s survivability or growth, it’s vital to explore all avenues well in advance.
“Plan, plan, plan,” advised digital.accountant founder Paul Layte in a recent Swoop funding webinar. “It’s too late if the business needs funding tomorrow. So you’ve got to be thinking months if not years ahead and planning for that.”
Whether you’re a manager in the business or acting as an adviser, part of that planning process is to identify the nature of the finance need and the conditions that will affect the borrower’s ability to pay for it. A clear-cut business bank loan with a low interest rate could fit the bill. But the way finance works these days, there are likely to be better options out there if you take the time to match them to the needs of the business.
Business support loans
During 2020, most businesses probably considered the various schemes the government set up to help SMEs during the coronavirus pandemic, including CBILS and BBLS. Soon the interest repayment demands from those loans will start arriving, so borrowers may need to think about refinancing options if their businesses are still in recovery mode.
What other sorts of financing might be available besides loans? Here are some of the options to consider in different circumstances.
If you’re planning on acquiring equipment, consider leasing rather than buying these products. This form of asset finance is especially useful for startup businesses or larger ones looking to replace old equipment.
You’ll have to select either a finance lease or an operating lease. An operating lease is a better choice if you want to rent an asset for the short term. You also won’t have to take on the maintenance and insurance costs of the asset, which you do for a finance lease.
While renting can work out as more expensive than purchasing outright, both types of leasing mean that the asset is counted as a rental expense, which can then be offset against profits for corporation tax calcuations.
If you process a lot of payments through invoices, then invoice finance is especially worth considering. It may take time for some clients to pay for work or purchases, which can slow the business cashflow and delay expansion plans.
With invoice finance though, a lender can advance up to 95% of the invoice value, with the remaining 5% paid at a later date. In other words, you can unlock the value of your invoices earlier at the cost of the lender’s fee.
Note that there is invoice discounting and invoice factoring, the main difference being whether customers are aware invoice financing is being used. With invoice discounting, there is the option not to disclose that this is being applied.
A range of trade finance options are available for importers and exporters. For businesses that face cashflow problems, maybe because their activity is seasonal, a revolving credit facility would be a sensible option. This flexible, open-ended loan allows recipients to borrow money from a pile of cash. They only have to pay monthly interest on the amount they took from the pile before taking more when needed, rather than on the entire lot at once.
R&D claim finance
To illustrate the dynamic nature of the finance scene, the rise of R&D tax credits has spawned tax credit loans that allow businesses to access the payments early. Taking this kind of loan depends on whether the business genuinely invests in the kinds of research and development activity that qualifies for R&D tax credit payments.
If so, the business can claim the cash within a week of speaking with the lender, rather than the months or years that it can take HMRC to process claims. This accelerated route could be the ideal cash injection during these trying times.
Some of the options listed are based on assets within the business such as unpaid sales invoices or tax rebates. For broader needs, unsecured finance may be needed – if the business’s trading history and credit rating merit it. While the pressure is more obvious to pay off a secured loan, neglecting unsecured finance is a common way businesses fall into debt.
The disruptions caused by Covid-19 forced businesses and advisers to become much more involved with the finance market during 2020. And with the continuing uncertainties surrounding Brexit, that requirement is unlikely to go away in the next year or two.
To ensure businesses keep their heads above water, remember to apply the finance mantra that a clear understanding of the firm’s goals, structure and financial status will help you identify the right kind of finance to help it succeed.
To find out more about Swoop and the finance options available to your clients, contact their dedicated advisor team to book a free consultation.