1 Finance for Business Growth A Presentation by Clive Lewis, Head of Enterprise, Institute of Chartered Accountants in England & Wales (ICAEW)
2 Finance for Growth Businesses Presentation will cover: Do you need finance or better financial management? (slide 3) Key questions before raising finance (slide 4) Conventional finance alternatives (slides 5 9) Newer sources of finance banks (slide 10) On-line sources of finance (slides 11-22) Bank s Appeals Process (slides 23-24) British Business Bank (slide 25) How an accountant can help you access finance (slide 26) ICAEW Business Advice Service (slides 27 to 29)
3 Do you need finance or better financial management? A business should have a continuous focus on cash flow Good practices and clear lines of responsibility are important. Have clear credit agreements with customers and suppliers Have a system for following up late receipts from customers Knowing your current bank balance and how you expect it to change over next 3 months is vital Good financial management not only helps manage cash it will reassure finance providers A growing business can mean increased finance requirements. Plan and control your finances to meet any increased need.
4 Getting the appropriate finance for your business Some key questions to consider before seeking finance: How much are you looking to raise? Are monies needed for short or long term needs? Are monies needed for growth or just to sustain your business? Are you prepared to offer security over a business or personal asset or guarantees? How would you repay a loan? Are you prepared to bring in an outside investor and give up either a minority or majority stake?
5 Equity Finance Shares or equity are issued to owners of a business. The investor wants a steady stream of dividends and capital appreciation i.e. there is no expectation of repayment as with debt finance. In public companies the shares will usually be traded on a recognised stock exchange and so can be sold at any time. In private companies there is no obvious market and shares must often be offered to other shareholders before any sale to outsiders. Growth business require equity finance for expenditure such as research and development or significant marketing expenditure. Alternatively you may wish to acquire another business. In these cases raising equity finance may be a solution.
6 Debt Finance - security A loan will often be accompanied by one of three forms of security - a personal guarantee, a charge across all a company s assets (an all asset security agreement/a debenture), or a security on a specific asset (asset backed security). A personal guarantee is an agreement between an individual and a lender whereby the individual agrees to be responsible for assuming the debts of another person or a business. Business owners or a director of a limited company will want to borrow money in your own name to support the cash flow of the company. If the business runs into financial trouble you will be required to cover any losses of the lender. Consequently your personal assets will be at risk.
7 Getting the appropriate finance for your business Bank and Invoice Finance Loans - Normally secured by a charge over asset(s). Often has conditions attaching to the loan ( covenants ) which can trigger a demand for immediate repayment if they are not met. Overdraft -The lender offers a facility with a limit with an agreed interest rate and probably secured. The business can dip in and out of the facility up to the limit. Debt Factoring To consider factoring the business needs debtors with a good credit record. The factoring company pays a percentage of the debtor book immediately to your business. Factor chases debt Invoice Discounting allows the business to administer the sales ledger and the customer is unaware that the debt has been discounted.
8 Getting the appropriate finance for your business Other Asset Finance Outright Purchase or Deferred Payment -asset(s) can either be purchased outright or paid for by instalments. There are various types of deferred payment - hire, hire purchase or leasing. Mortgage normally be used to finance a property acquisition or to expand an existing business premises. Similar to a bank loan with the mortgage usually being secured over the premises. Loan to value ratios vary but unlikely to exceed 70%
9 Getting the appropriate finance for your business Equity Finance Self funding, friends and family - A business owner with their own funds or those of friends and family, inject monies into the business. This can be by way of a loan or equity finance. Must put agreement in writing Small Scale Equity Finance - businesses sell a share in the business to friends, family, business angels or other private investors. They must be prepared to allow others a say in how the business is run. Business angels bring (up to 2 million) finance to a business and they normally have experience in what makes a successful business Venture Capital - Invest in businesses with potential for high growth based on proven track record. A detailed business plan is essential. Will want a clear strategy for achieving growth. Tax relief Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trust Scheme (VCT) offer tax reliefs for investment in unlisted growth companies
10 Newer sources of finance Newer Banks some examples Handelesbanken specialise in providing personalised and bespoke banking services to both corporate and individual customers. Decisions about your banking are made by your local branch.www.handelsbanken.co.uk Metro Bank offers business overdrafts, loans and credit cards. Longer opening hours than high street banks.www.metrobankonline.co.uk/commercial Shawbrook Bank - all lending is done through independent brokers/ strategic partners. Aldermore lends to SMEs through asset finance, business mortgages and invoice finance. For further information do a web search
11 Newer online sources of finance: Debt funding Equity finance Working capital funding factoring & invoice discounting Seeking to match businesses looking for finance with individuals and businesses looking for diversification of risk and yield. Business models vary. Vital to understand how risk of proposition has been assessed. Cost proportionately higher than bank finance but risk often greater. Internet Finance not within the Financial Services Compensation Scheme
12 Debt Funding (or Peer to Peer Lending) through the Internet Applicants fill in on-line application form Acceptance criteria vary but for Funding Circle will include the following: Must be UK based limited company At least two years financial reports Making a profit and a good credit rating May require up-to-date management accounts Details of other loans and commitments Responses are usually quick. Funding Circle says it s credit assessment team will give an answer on the application in 2 days.
13 Peer to Peer Lending On acceptance Once accepted for entry loan applicants enter auction in a marketplace. A risk rating is applied to guide lenders Registered lenders start bidding the amount they are prepared to lend and the interest rate they expect to be paid As bidding intensifies the interest rate tends to drop Applicants can accept the loan as soon as it is fully funded. Alternatively the loan can be kept live for 14 days to see if the rate drops further Once loan accepted applicants can expect the money to be in their bank accounts. This varies from same working day to two weeks An arrangement fee either a percentage of the loan or a fixed amount is charged on the loan. The applicant repays the loan to the peer-to-peer lender who is responsible for distributing the repayments to all lenders involved in the loan
14 Peer to Peer Lending Some providers : Funding Circle loans 5,000 to 500,000 www fundingcircle.com Thincats loans 50,000 to 1M Rebuildingsociety - 2,000 to 50,000 to cos with turnover over 200,000. FundingKnight loans 25,000 to 100,000 to well established SMEs. Wonga for business short-term loans to 30,000
15 Peer to Peer Lending Vs Bank Finance Advantages over bank finance: Application process is generally quicker Generally less onerous security requirements Disadvantages over bank finance: Interest rates generally higher particularly where security and guarantees not available Arrangement fees higher For lenders: P2P in early stages so bad debt levels low. Bad debts not tax deductible for lenders But some P2P lenders have central fund to help mitigate bad debts
16 Equity finance (Or Crowd Funding) through the Internet Businesses seeking equity must: Complete a questionnaire specifying how much finance required and the equity on offer The disclosures are reviewed to ensure they are fair, clear and not misleading. Listing is then approved If full amount offered within a specified period, go to closing, if not, investors get money back In closing legal due diligence is conducted and business signs documentation and on-line platform subscribes for shares on behalf of investors
17 Crowd Funding Continued Fee for obtaining finance paid at this point Post-investment online platform holds shares as nominees for investors. Dividends or when business floats or sells out the on-line platform passes the proceeds back to investors Some on-line equity funding: Crowdcube www. Crowdcube.com Raised 11m for 60+cos with 42,000 registered investors Seedrs invests in seed-stage start-ups seeking up to 100,000 of equity-
18 Other Points on Crowd Funding Tax breaks such as Seed Enterprise Investment Scheme (SEIS) can make Crowd funding more attractive Issues with second round funding with so many first time shareholders. Research indicates that around 50% to 70% of business startups fail completely. Investors advised to spread investment to diversify risk. FCA intention is to restrict financial promotions for unlisted shares or debt securities to sophisticated investors, high net worth individuals, investors taking authorised advice and to limit investment in this class to 10% of net investible portfolio
19 Working capital through the Internet Lending usually based on factoring and invoice discounting or selling future credit card income Factors & invoice discounters include Marketinvoice Platform Black Receivables Exchange
20 Working capital through the Internet Credit card companies include Boost - Business supplies evidence of recent card turnover - Boost makes an offer of a cash advance based on turnover - Boost agree to by future credit/ debit card receivables at a discount - Daily repayment made via small fixed percentage of future credit/ debit card sales - Business advises card processor to send settlement funds to escrow account - Funds collected and remitted through a proprietary escrow service using Barclays AMS client account
21 E-Invoicing, debtor management & arranging finance Various packages available. Following is Bilbus Create a sales invoice or upload from a template Invoices can be electronically submitted to customers in a number of ways including by direct from your accounting platform or integrating with accounting platform and sending direct to customer portal Platform sends automated reminders to customers Customer updates to status of invoice in their system can result in automatic update of your collections forecast Platform provides feedback on customers payment performance and cost of outstanding debt Platform can be linked to an application to a finance provider
22 Recent Developments in Internet Finance The Financial Conduct Authority (FCA) assumed responsibility for regulation of the sector on 1 April It has focussed on establishing standards for credit checking procedures and minimum capital requirements Concern that too strict standards will push up costs making conventional forms of finance more attractive.
23 Getting the best from your bank If refused credit by a bank Get a written explanation for the decision Consider requesting an appeal 40% of appeals result in the decision being overturned frequently because business provides additional information. Bank should offer suggested alternative sources/types of finance Review banks feedback and consider applying to another bank or source of finance Ask is equity finance the way forward?
24 Getting the best from your bank All major UK banks have agreed a set of principles if your formal application for finance has been refused and you appeal the decision An independent and external team of reviewers monitor the principles and the banks application of them The appeal is reviewed by a second person from the bank not involved in the original decision The reviewers have 30 days to communicate the result of your appeal to you. 40% of appeals reviewed in the first year resulted in the original refusal being overturned. In a majority of these cases this followed additional information being submitted. For more information ask your bank or look on the Better Business Finance Website
25 British Business Bank The British Business Bank now operates as a Governmentowned financial institution It will control 4 billion of government finance schemes and expects to leverage 10 billion of SME access to finance.. Working with 70 partners, it uses its funds to unlock finance for thousands of smaller UK businesses It operates where a market failure can be demonstrated either on commercial terms or on subsidised, non-market terms
26 Getting finance how might an accountant help? Many accountants offer advice on business finance. An adviser can help with: Reviewing the business to identify its financing status and needs Identifying the most appropriate sources of money Guidance on investor expectations and attitudes Preparation of the business plan and assisting with presentations to finance providers Support through the funding and due diligence process They will make a charge for the work ask for a quote before you ask them to help.
27 ICAEW Business Advice Service (BAS) ICAEW firms displaying this logo:
28 ICAEW Business Advice Service BAS offers an initial consultation for businesses and start-ups with an ICAEW Chartered Accountant free of charge. An opportunity to discuss your business issues with a finance professional Discussion can cover business issues from record-keeping to managing cashflow
29 ICAEW Business Advice Service Go to: businessadviceservice.com Or To find BAS firms in your area.
30 A world leader of the accountancy and finance profession
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