Home Budget 2007 Company Profile Services Accountancy Zone Business Zone Tax Zone IR35 Update News Articles Feedback Search Legal Notice How To Find Us Accessing capital to fund your growth Finding funding for your business will probably be one of the most important and challenging aspects for any entrepreneur. Here we discuss a number of avenues open to you for accessing the capital needed to grow your business. Asset Finance This covers all those agreements you have to sign when you can't (or simply don't want to) hand over cash for equipment. It's often overlooked in favour of a bank overdraft. But asset finance can save you money. The main choices are: Hire purchase Lease purchase Leasing/financial leasing Operating lease (contract hire) Probably the most common method of finance in the UK today is hire purchase. The borrower (you) purchases an asset today by entering into a hire purchase agreement. Usually you will have to pay an initial deposit (between 10% and 20%) followed by an agreed number of monthly, quarterly or even annual instalments. The monthly instalments can be fixed or they can vary. During the term of the agreement, you own the use of the asset but full title does not pass to you until the agreement is completed and all fees have been paid. If you don't keep up repayments the lender may be able to repossess the asset. The benefits of this type of finance include: the ability to spread the cost of the asset over a pre-determined period of time; the ability to claim capital allowances on the asset; and the ability to reclaim the VAT in the same way as if you bought the asset for cash. Lease purchase is almost the same as hire purchase. There are, however, some differences. In particular, it is more flexible when it comes to payments and how they can be structured. In other words, you can increase or decrease your repayments to suit your business circumstances. If you want, you can decide to pay back 75% of the loan in year one and the remainder in later years. This can provide benefits for companies with seasonal cash flows. Remember when comparing quotes for hire purchase or lease purchase to always compare the APR (Annual Percentage Rate) as well as any administration charges. A lease or finance lease at first looks very similar to both hire purchase and lease purchase. You acquire the asset, and complete a finance lease - then your lease company will send the agreed amount to the supplier. The payments can be structured in the same way as lease purchase (basically almost any variation the finance company will permit). The vital difference is ownership of the asset (and how this effects your VAT payments and writing down allowances when you do your accounts). Throughout the term of a finance lease, the asset remains the property of the lease/finance company. It is basically a long term hire agreement. At the end of the agreement, you don't take ownership of the asset. You do pay VAT on the monthly payments but you should be able to claim these back. An operating lease is completely different from the other options listed. The most common form of operating lease is contract hire. In a nutshell, you simply rent an asset from a leasing company for a pre-determined period of time, and at the end of the agreement you hand the asset straight back to the lease company. The lease company take into account the future value of the vehicle when calculating the monthly payments so, if you are leasing a car, the more miles the vehicle does has a direct result on the residual value of the vehicle at the end of the lease and thus the residual value calculated by the leasing company. This form of leasing has many advantages - it's cheaper for a start. You aren't buying the asset so you don't pay capital payments on the whole cost of the asset. So if you are buying an asset for £10,000 and the dealer/leasing company provides a residual value of £4,000 in 3 years time, you will only have to repay the difference (£6,000) plus interest. As with finance leases, you do not claim writing down allowances, but simply offset the lease rentals against tax. Before entering into a lease contract, always check and be aware of the return conditions. As the whole agreement revolves around the future value of the asset, the lease company will give you a list of return conditions. Banking When you open a business account you will be looking for a range of new services and a positive, on-going relationship with your small business account manager. Most of the major banks offer small business packs to assist you. Don't assume your current bank will be able to deal with a business account in the same way they deal with your current domestic account. It may be worth changing banks, or even moving to a different branch - the level of service and support you receive can vary, even within the same bank network. Meet with your prospective manager before signing up for anything. Make sure they understand what you want and what your business does and ask around for recommendations within your local area. Remember that how you manage your relationship with your banking adviser is as vital as how you manage your money. Maintain regular contact. Think ahead about your likely banking needs. Before opening an account or changing an existing account there are a few things you need to be aware of concerning your own business: How much does/is your company going to spend on banking each year? What are your current bank charges? Are you likely to need to use other bank services such as loans? Do you need a high street branch, or would a postal service be as good? Does you bank offer on-line services? Banking is becoming extremely competitive, so make sure you shop around. Get hold of all the relevant marketing brochures and leaflets, compare the charges and tariffs, and ensure that they match your potential business needs. Not unreasonably, bank transaction charges are usually broadly related to the amount of work the bank has to do on your account and the costs it incurs. You can minimise these by: Ensuring that you are on the right tariff for your business. If you have very few transactions but they are for large amounts, a tariff related to turnover is probably not the best for you. Make use of credit balances. Rather than keep them in a current account where you will earn nothing, open a deposit account where you can make the money work for you. Investigating whether an on-line banking facility would be cheaper. DTI Loan If you have tried to get finance from the usual sources and failed because you had no security for the loan, you may be able to get help from the Small Firms Loan Guarantee Scheme. The scheme guarantees loans from banks and other financial institutions. If your business turns over less than £1.5m per year (£3m in the case of manufacturers) you may qualify for help. Loans are available for periods between 2 and 10 year on sums between £5,000 to £250,000 (maximum of £100,000 for companies trading less than 2 years). The DTI guarantees 85% (70% in the case of a business trading for less than 2 years) of the loan. In return for the guarantee you (the borrower) pay the DTI a premium of 1.5% per year on the outstanding amount of the loan. The premium is reduced to 0.5% if the loan is taken at a fixed rate of interest (the commercial aspects of the loan are a matter for you and your lender). Factoring/Invoice Discounting Once considered taboo, factoring has now become one of the most acceptable ways of accessing funds for growth. The following statistics prove this: Funds factored in the UK grew by 7% in 1998 to over £14 billion. A further £40 billion was handled by Invoice Discounters. UK Exporters using factoring facilities added a further £3 billion of turnover to the domestic factored turnover. More than 16,000 companies are using factoring. Over 6,000 companies are using invoice discounting. There are over fifty active providers of this specialist invoice finance, each with its own target market and method of doing things. A very dynamic marketplace also sees new and established providers offering something a little different. They can generate additional cash for businesses alongside the straightforward invoice financing products. These asset based lenders or "smart bankers" are now taking on roles traditional handled by the High Street or Merchant Banks. Essentially, the factor buys the invoices that you raise on normal credit terms - 14, 30, 60 or 90 days. The factor will then remit, normally within 48 hours, between 70 and 85% (depending on the agreement you have) of the VAT inclusive value of those invoices. This is normally done by simple bank transfer giving you immediate access to working capital, to help you finance your business. This payment is normally referred to as a "prepayment", "drawdown" or "initial payment". As part of the factoring service, the factor will administer your sales ledger, issuing statements and following up with chasing phone calls and letters. Most good factors will allow you some input and flexibility on how this is done, ensuring goodwill is maintained with your customers, whilst still collecting the money in an efficient manner. When your customer pays the factor, the balance of the monies (the difference between the prepayment and the full value of the invoice) is passed back to you. A form of factoring exists which will protect you, the client, in the event of the failure by your customer to pay for reasons of receivership or insolvency. The scheme will cost you a service charge, normally between 0.5% and 3%, based on what the factor believes it will cost them to administer your sales ledger. This depends on how many customers you have and how many invoices you raise, as well as the size of your business. A facility which includes some bad debt protection, will cost a little more. A further discount charge, normally between 2% and 3% over the current bank base rate is normally levied. This is often cheaper than the cost of an overdraft facility. On the plus side, factoring can provide the following benefits: Improved cashflow, normally without any formal upper limit. The finance grows in line with your sales, unlike more traditional methods of funding, such as a bank overdraft. Factors only rarely ask for additional security beyond a charge over the book debts of the business. Sometimes a personal warranty or full personal guarantee is required to safeguard the factor from fraud, and/or losses. This is often required in a newly established business. Against a given level of debtors, a factor will lend up to 80% or more. A bank will typically allow 50% on overdraft (because the factor knows more about the debtors). Debt turns usually improve when a business uses a factoring service. A good effective chasing procedure can bring real benefit to a business, which lacks the resources, the time or so often a combination of the two, to do the job themselves. Many bank managers are pleased to see their customers are factoring. They know the value of effective cashflow can improve the fortunes, and help secure the long term future of a growing business. Frees up management time to drive the business forward. However, there may be some disadvantages, including: Factors don't accept every type of debt or debtor. Your customers know you're factoring. There used to be a stigma attached to factoring which was seen as a last resort, but no longer - use of factoring has shot up in recent years. Factoring is not the cheapest method of finance. Most businesses offset the factor's charges by adding them into their prices. The most successful generally use the cash to negotiate early settlement discounts from their suppliers - this should be an avenue to explore when considering the overall cost of such a service. Sometimes there can be a minimum term for the contract, sometimes 1 year, or as long as 3 years. Such contracts can cause a problem if the factoring service does not bring the benefits you expect, or if your business changes course, or fails to achieve your expectations for growth. Invoice discounting offers the real cashflow benefits that factoring offers but without the need to lose control of your sales ledger and existing methods of credit control. Factoring companies usually look for well-established profitable businesses with an effective and professional sales ledger administration system, before they are prepared to offer this form of facility. Generally turnover needs to be running at over £500k to qualify. Service charges (often known as "commission charges") are usually much lower than for factoring for the obvious reason that the sales ledger administration is still your responsibility. Discount charges vary from case to case but are usually between 1.25% and 3% over base rate. Often a discounter will try to match or beat the rate currently being charged by the client's bankers. This method of finance is becoming an increasingly popular method of financing mergers and acquisitions, MBOs (management buy outs) and MBIs (management buy ins). 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