The Dynamic Business Strategies Ltd Guide to Business Finance By. Alan Briggs

Transcription

1 The Dynamic Business Strategies Ltd Guide to Business Finance By Alan Briggs Dynamic Business Strategies Ltd The Counting House 14 Walford Place Chelmsford Essex CM2 6PG Tel: Website: Twitter: BizzyBizExpert Facebook: BizzyBizExpert Linkedin: VoiP: Skype: alanstreetc Registered in England. Reg No

2 Whether you are raising finance to start up a business or to fund cash-flow of costs and overheads or even funding for growth to expand, selecting the right source of finance is vital. Getting it wrong can be expensive or in the worst case scenario it can be disastrous. But remember doing nothing is not an option, money is the life blood of any business or organisation without it they are dead in the water! That s why I have written this guide to finance, 20 years of experience has taught me that many businesses get the decisions on finance wrong. I hope that you will find this guide helpful but remember I am only a call or away. Loans, Overdrafts and other Options The starting point should be what do I need the money for and which is the most appropriate way to finance. For Start Up businesses these decisions are even more critical but a good starting point is can I obtain a loan from family or friends? Loans from friends and family Approaching family and friends for funding can be an easy and flexible route to finance. Approached in the right way, this type of funding can provide a fast, affordable solution to your loan requirements. Benefits Friends and family are more likely to be able to offer you a low interest loan, or one with no interest attached at all. They will probably consider lending over a longer period than conventional sources and may be willing to adjust the terms of the loan. As people who know you well, they will also be a good judge of your character and are less likely to need a detailed business plan from you. Avoiding problems Be open about the risks involved and outline worst-case scenarios. If you have been turned down by conventional sources, consider whether you should approach your friends or family member for a loan at all. Be open about why these sources may have refused you credit and emphasise to the family member or friend that they should not lend more than they can afford to lose. Relationships are at stake if problems arise with an informal arrangement. It is vital that you draw up a formal agreement between both parties involved. Setting down terms of the loan in writing will avoid the misunderstandings that often arise as a result of verbal agreements. Include any tax implications for both parties. This applies to interest-bearing loans only. Bank Overdrafts An overdraft is a borrowing facility attached to your bank account, set at an agreed limit. It can be drawn upon at any time and is ideal for your day-to-day expenses, particularly to see you through Cashflow problems. It is worth noting that loans are probably more appropriate for long-term funding. An overdraft is likely to cost more than a loan for a long-term purchase. Also, there could

3 be stiff charges if you exceed your overdraft limit. Also the bank has the right to ask for repayment of the amount you are borrowing at any time. Advantages An overdraft is flexible - you only borrow what you need at the time which may make it cheaper than a loan. You only pay for the funds you use. It's quick to arrange. Disadvantages It has to be rearranged regularly. An arrangement fee is usually payable when credit is extended, perhaps during the term of the facility. It can be called in by the lender at any time. You face administration fees if you exceed the agreed limit. Overdrafts may be secured against business assets - the lender can take control of these if you don't repay the overdraft. Unlike loans you can only get an overdraft from the bank where you maintain your current account. In order to get an overdraft elsewhere you need to transfer your business bank account. Bear in mind that what starts out as a good deal may change, and so may your business needs. It's worth reviewing your options regularly. Bank Loans Small businesses approaching banks for a loan or overdraft are regularly viewed by the banks as high-risk borrowers and find it tough to support at the best of times. During economic uncertainty banks tighten their lending criteria and it can feel next to impossible to get funds. Before you approach a bank there are some steps you should take to reassure lenders that you are worth the risk. The first step before you contact any banks is to ask yourself whether a loan is what you really need. A loan should only provide fixed-term financing to cover business development or purchase fixed assets, such as plant and machinery. If you need the flexibility of short term finance to cover day-to-costs, you are likely to be better off with an overdraft. It is also worth considering alternative sources of funds. Invoice financing may be a solution if appropriate, although it can be costly. Friends and family may be able to lend you money; a business angel or partner could give you the investment sum you need, although this may be harder to obtain than a bank loan and means giving up a portion of your business. Tactics for Securing Loans If you seek a loan, look for a good overall deal. Your own bank may be willing to negotiate terms based on your track record; otherwise, consider going somewhere else. Advisers or Finance brokers often compare business loans from different lenders. But don t consider the interest rate only, but take into account the whole cost

4 of the loan, as well as its due date, terms of repayment and the lender s security requirements. You will need that you to prove that you are a low-risk investment assemble all the proof a prospective lender needs. An up-to-date business plan illustrating how the loan will improve your business is essential, as well as a breakdown of your trading and financial history. Click here to contact me for more information and hear how I can help owners develop a business plan and become finance ready at low cost Banks will also want to see your balance sheet, cash-flow and profit & loss forecasts showing where repayments will come from. They will also want to look at a list of your assets and, as a small business, will probably want to know about your personal finances. Having this information ready will emphasise the impression that you are a serious proposition, in spite of any wider economic concerns. Putting the documents together will also help you understand whether you have a realistic chance of securing a loan and whether you even really need it. Security Issues You are likely to have to provide some of the capital. By offering security, in the form of business or personal assets, (including your home) the bank may be willing to lend you more, or offer a lower interest rate. Security is always likely to be part the bank s decision especially during a period of restricted lending and they will typically lend up to 70 per cent of the value of a property. But think very, very carefully before you offer your house, unless you are certain you can make the repayments. However great your business need, it is unlikely to be worth losing your home for. Providing a guarantee for your loan A new business with no financial track record can find it difficult to get a loan. Banks and other lenders may require another person or another business to guarantee the loan. The guarantee means that the lender will claim on the person providing the guarantee if your business cannot meet the repayments. A loan guarantee could be obtained from: yourself if you run a limited company people involved in the business an external guarantor - such as a business person who does not want to make a direct investment but may be willing to take the risk of giving a guarantee the Department for Business Innovation and Skills s (BIS) Enterprise Finance Guarantee - see the section in this guide on the Enterprise Finance Guarantee You may have to pay a provider of a loan guarantee a regular fee or a one-off premium - usually about two or three per cent of the loan amount. Some loan providers require you to take out loan repayment insurance to cover repayments if your business meets Cashflow problems. You could consider this as

5 security for yourself even if it is not required. But you need to include the cost of this in your total borrowing cost and weigh it against the risk of failing to meet the terms of your loan. If you are using a financial broker, you can ask them to advise on the best insurance deal. Personal guarantees vs limited liability If you operate a limited company and your business is new - with no track record - banks and major creditors will usually require personal guarantees from the backers of your business. This may be either the directors, including you, or major shareholders but is often both. Limited liability generally protects shareholders from being sued by the business' creditors for their personal assets. However, where a personal guarantee for a bank loan is issued, the individual can be held personally liable for the debt. You should always be careful when giving personal guarantees. Where possible ensure that they only apply to specific debts or loans. A widely drawn guarantee could render you liable for all of the losses of the business. However, under the Banking Code, guarantees given in support of bank account borrowing must not be for an unlimited amount. Enterprise Finance Guarantee The Enterprise Finance Guarantee (EFG) has been established by Department for Business Innovation and Skills (BIS) and supports additional bank lending to viable Small & Medium Sized Enterprises (SMEs) which do not have the security to secure a normal commercial loan. The Government provides the lender with a guarantee for which the borrower pays a premium. Accredited lenders administer EFG and make all decisions on lending. EFG was originally launched in January 2009 to help viable small businesses to obtain the working capital and investment that they need during a time of unprecedented tightened credit conditions. It now aims to help such businesses seeking finance for investment and growth as the economy recovers. EFG is a targeted scheme to be used by banks on a discretionary basis. It is not designed for the majority of viable businesses to whom banks should lend. It is also not a means through which businesses or their owners can choose to withhold security a lender would normal lend against; nor is it intended to enable lending to businesses which are not viable and that banks have declined to lend to. The Enterprise Finance Guarantee will continue until As a first step full guidance notes are shown on the BIS website. EFG Eligibility Criteria EFG supports lending to viable businesses with an annual turnover of up to 25m seeking loans of between 1,000 and 1million. It is available to businesses in most business sectors.

6 However, EFG is subject to certain sector restrictions arising from the EU de minimis State Aid rules, the Industrial Development Act 1982 (which provides the statutory basis for EFG) and also for national policy reasons. The main sector restrictions are provided in the EFG Business Sectors web page. EFG is used by banks when addressing the debt finance requirements of viable businesses which although they do not have sufficient security, can demonstrate to the lender that they have capacity to ultimately repay the loan in full. Types of EFG Facilities Available Under EFG, the following facilities can be guaranteed, repayable over a period of between three months and ten years until otherwise indicated: New term loans (unsecured and partially secured) for working capital or investment purposes Refinancing of existing term loans, where the loan is at risk due to deteriorating value of security or where for cash flow reasons the borrower is struggling to meet existing loan repayments Conversion of part of all of an existing utilised overdraft onto a term loan in order to release capacity in the overdraft to meet working capital requirements Invoice Finance Guarantee providing a guarantee on invoice finance facilities to support an agreed additional advance on a business's debtor book, to supplement the invoice finance facility on commercial terms already in place. (Available for terms up to three years) Overdraft Guarantee providing a guarantee on new or increased overdraft borrowing where the business is viable but has inadequate security to meet a lender s normal requirements for the level of overdraft requested, (Available for terms up to two years) An EFG lender may not necessarily offer the full range of lending types provided for under the EFG rules if they are not compatible with their normal commercial lending practices. Application Process Businesses seeking debt finance can approach one or more of the participating lenders. The lender will typically assess the business against their normal commercial lending criteria for instance with regard to the viability of the business, the ability to service the loan, and the availability of existing security, in order to determine whether they wish to lend. Where a bank determines that use of EFG likely to be appropriate, they confirm eligibility and record details of the borrower and their facility via a secure web portal through. An overview of the EFG application process is available here. However, there is no automatic entitlement to receive a guaranteed loan and nor is there any pre-qualification process for it. Decision-making on individual loans is fully delegated to participating lenders and integrated with the commercial decision to

7 lend. Department for Business Innovation and Skills plays no role in the application or decision making process. The Government Guarantee By providing lenders with a Government-backed guarantee for 75% of the loan value, EFG supports lending that would otherwise not take place. EFG is intended to support lending to businesses which can ultimately repay their loan in full. The guarantee provides protection to the lender in the event of default by the borrower - it is not an insurance for the borrower in the event of their inability to repay the loan. The borrower pays a 2% annual premium which partially covers the cost of providing the guarantee. The premium is assessed and collected quarterly in advance throughout the life of the loan based on the outstanding capital balance of the loan. The borrower is provided with a premium schedule by the lender as part of their loan documentation and collection is made by Direct Debit under the description "BIS LOAN GUARANTEE". The interest rate charged and any other fees and charges applied to the loan are a commercial matter for the lender. Personal Guarantees / Security EFG allows banks to take security, including personal guarantees, in connection with an EFG backed loan. In looking to take that security the lender is required to apply their normal commercial policies in determining the extent and value of security available. The practice of taking personal guarantees from business owners and others associated with a business is an established mechanism for ensuring personal commitment to the repayment of the loan by the business and, in EFG, this means that there is a three-way sharing of risk between borrower, lender and the Government. The exception from normal commercial practice is that lenders are not permitted to take a direct charge over a principal private residence for a new EFG backed loan. However, the EFG rules only apply to any loan or facility guaranteed under EFG. It does not apply to any non-efg lending. In guaranteeing the loan, the taxpayer is taking a risk, so it is right the risk is shared by the lender and the borrower, as it would be for any commercial loan. The taxpayers liability to defaults is capped in accordance with the de minimis regulations, to which EFG is subject. This acts to ensure commercial rigour is applied in relation to lending decisions and that undue risk and cost is not placed on the taxpayer. Enterprise Finance Guarantee: Further help The delivery of EFG, including the decision on whether or not it is appropriate to use it in connection with any specific lending transaction, is fully delegated to the participating banks. Capital for Enterprise Limited manages the operation of EFG on behalf of BIS. All decisions relating to the use or otherwise of EFG in individual cases are fully delegated to the participating lenders. Businesses are advised to approach one or more of the participating lenders to discuss their borrowing needs. If a business

8 which has received an EFG backed loan subsequently has any issues with their loan, including issues relating to premium collection or alterations to their repayment profile, then they should raise them with their lender and not with BIS or CfEL. Please note that neither BIS nor Capital for Enterprise Ltd (CfEL) can advise on individual eligibility queries. Nor will BIS or CfEL intervene in the commercial relationship between Borrower and Lender in the event of disputes. Customers dissatisfied with the experience of dealing with their bank should raise their concerns initially through the bank s own customer complaints procedure. If the matter is not resolved businesses with a turnover of under 2 million and fewer than ten employees have the option of taking their complaint to the Financial Ombudsman Service or on Businesses may also wish to seek legal advice if there is a contractual dispute. Other Sources of Lending There are a number of other sources of finance some of whom are who have been established to assist individuals and existing businesses who have difficulties in obtaining finance from other sources. Other new and innovative facilities such as crowd funding websites provide loans in flexible ways. Community Development Finance Institutions CDFIs provide finance for a wide range of purposes, although these will vary according to each individual CDFI. They include: Working Capital, Bridging Loans, Property and Equipment purchase, Start up Capital and Business Purchase Community Development Finance Institutions (CDFIs) lend money to businesses, social enterprises and individuals who struggle to get finance from high street banks and loan companies. They help deprived communities by offering loans and support at an affordable rate to people who cannot access credit elsewhere. Who do CDFIs help? Most CDFIs are based within the UK s most disadvantaged communities. They provide loans and support to: Microenterprises (businesses with less than 10 employees) Small businesses (with employees) Medium businesses (with employees) Social enterprises, community organisations or charities Individuals CDFIs can serve one or several of these markets, but often they specialise in just one. Most lending by CDFIs is to microenterprises and social enterprises. CDFIs traditionally provide loans to people who face barriers to accessing finance. For example, they may lend to individuals with a poor credit history or little collateral, or provide business loans to entrepreneurs with little business experience.

9 What do CDFIs finance? CDFIs provide finance for a wide range of purposes, although these will vary according to each individual CDFI. They include: Working capital Bridging loans Property and equipment purchase Start up capital Business purchase CDFIs will usually only lend to customers who have been unable to get the finance they need from a high street loan provider, such as a bank, building society or loan company (these are sometimes known as mainstream lenders ). Some CDFIs require proof that the customer has been turned down by a mainstream lender. Some CDFIs will provide an extra loan if a business is waiting for finance to come through from another source, or if a bank is only willing to lend part of the finance they need (these are sometimes known as co-financing, gap financing or bridging loans ). How is a CDFI different from a normal bank or loan company? CDFIs are small, independent organisations, not part of multinational companies like the banks. CDFIs primary mission is not to make a private profit, but to support communities by providing affordable finance that would otherwise not be available. They recycle this finance again and again into communities. Many CDFIs are run with funding from the Government and charitable trusts, alongside other funding sources. Most CDFIs do not take savings or deposits like banks do. And because they are much smaller than banks, they can spend more time talking to customers about their needs and finding the right loan for them. Some CDFIs offer business support and financial advice in addition to loans. Personal-lending CDFIs offer an affordable alternative to high interest doorstep lenders. They keep their fees as low as possible and help customers to manage and repay their debts, unlike doorstep lenders which charge sky-high APR-rates and trap customers in spirals of debt. How are CDFIs funded? There are many different sizes and types of CDFI, and they are funded in different ways. All CDFIs use the income from lending activity for their running costs and to make more loans. They combine this with funding from a range of additional sources. Many are partfunded by Government departments and agencies. For example, a number of business-lending CDFIs in England were established with funding from the Regional Development Agencies, while many personal-lending CDFIs have funding from the Department for Work and Pensions Growth Fund.

10 Other funding sources include European grants, donations from charitable trusts, social investments, and grants and loans from high street banks. Are CDFIs reputable? Yes, CDFIs are reputable and some of the larger CDFIs are regulated by the Financial Services Authority (FSA). The sector s trade association, CDFA, with the FSA, has introduced a Code of Practice to put in place standards of operation. All CDFIs who are members of the CDFA are required to work towards full compliance of this Code of Practice. Advantages Loans are open to people and businesses with a poor credit history and to Start Up businesses. The loans are flexible - you only borrow what you need It's an easy process. Disadvantages You need to provide proof of inability to obtain finance from at least one bank You have to provide security if available. Click here to contact me for more information and hear how I can help you with your application for funding. Credit Unions Credit Unions are small non-profit financial organisations set up by members with something in common, to benefit their community. That common factor may be living in the same town, working in the same industry (e.g. the Police Credit Union) or belonging to a particular trade union. They re there to provide a financial community, where its members mutually benefit as there s no profit for third party shareholders. This can mean helping those who can t get access to ordinary bank products; a lifeline in less well-off communities for folks grappling with their finances. Plus, they can be a welcome alternative to payday loans or other risky forms of lending. They're not just for those struggling financially, they also appeal to those who want to bank ethically and benefit their community, and some larger credit unions, such as the police or the big Glasgow union, offer products that can beat mainstream finance. There are roughly 500 credit unions cover the UK offering loans, savings and current accounts to their members, and almost a million British people are members. They re all specific, so you need to check if there s one that suits you in your area.

11 From 2012 onwards the joining rules have relaxed a little, but generally, to be part of a credit union, you need to share a common bond with other members, such as: Live or work in the same area Work for the same employer as other members Belong to the same church, trade union or other association New for 2012: Organisations, as well as individuals, can now become members Credit unions provide affordable loans Credit unions provide loans at a affordable rates. Some credit unions loans will cost you no more than 1% a month on the reducing balance of the loan (an APR of 12.7%). For example if you borrowed 1,000 over 1 year, you would repay no more than 1,067 in total. Many credit unions charge less, some may charge more but by law this cannot be more than 2% a month on the reducing balance (an APR of 26.8%). Advantages Saving and Loan Organisation Loan Criteria is not onerous Loans are only open to individuals and not businesses. Can often borrow even with a poor credit history The loans are flexible - you only borrow what you need It's an easy process. Disadvantages Loans to people not businesses. Must have been saving for 8 weeks You need to have already been a member and made deposits to your account Click here to contact me for more information and hear how I can link you up with a Credit Union. Lenders of Last Resort Just like the consumer market of Pay Day Loans there are other ways of obtaining loans these could termed Lenders of Last Resort they tend to offer flexible loans but these come with a strong warning Caveat emptor or buyer beware! The internet is full of loan sources but they come with often penalising rates of interest. Some of the new entrants into this market are offering businesses who take payments by credit or debit cards a scheme that allows them to borrow based on future income. The loan repayments are made by the lender taking a percentage of every customer payment. But business owners should take a close look at the overall costs and the risk of any potential for a drop in sales. This is especially important to any seasonal based business as it can result in a longer than anticipated repayment term and a dramatic increase in the cost of the loan.

12 Advantages Loans are open to even businesses with a poor credit history. The loans are flexible - you only borrow what you need It's an easy process. Disadvantages You need to provide proof of ability to repay finance so financial records showing good performance are a must. Cost of loan interest percentages are very high. Click here to contact me for more information also download my free Finance Options Table, this document will help with evaluating which finance option is most suitable. Crowdfunding What is crowdfunding? Crowdfunding is an alternative method of raising finance for a business, project or idea, popularised by Kickstarter.com in the United States. Unlike angel investment, in which one person typically takes a larger stake in a small business; with crowdfunding an entrepreneur can attract a crowd of people each of whom takes a small stake in a business idea, by contributing towards an online funding target. It is believed that, in many cases, this model is more successful than attempting to source the full investment required from a single individual or organisation. While some investors may be hesitant to invest in an unproven idea, crowdfunding provides an alternative way to source seed capital from a number of backers. How much does it cost? The majority of crowdfunding platforms won t charge you for publishing a pitch, however they typically take around 5% commission when you reach your target so you need to add this into your investment total. If you don t meet your target, you don t pay a penny. To encourage people to invest in your start-up, most websites ask you to offer staggered rewards (such as exclusive access to your first product or a five-year discount on your services) according to how much people invest. However, there are also a couple of platforms, which allow you to offer a small proportion of equity in your business, to create an added incentive for potential investors. This is particularly appropriate for start-ups looking to raise larger sums of finance.

13 When could crowdfunding benefit a business? The main benefit of crowdfunding is that it creates a strong network of support for your start-up. With the equity model in particular, your investors are likely to become ambassadors for your brand promoting it among their networks, tracking your progress and becoming returning customers themselves. They may also offer to lend a hand, for example by providing free legal advice or accountancy services. If you promote your investment bid successfully, crowdfunding can also provide a powerful platform to raise awareness of your start-up. It gives you a newsworthy story to pitch to your local, and national, press (which may attract further new business). If you reach your target it also gives a clear message to potential clients, suppliers or future investors that you have the support of the public behind you. Furthermore, crowdfunding can provide a very fast way to raise cash several startups have reached their target in just a few days and there are normally no upfront fees, keeping the process simple. Most crowdfunding platforms will look after much of the legal administration for you as well. Crowdfunding also provides a simple and secure way for your friends and family to support your idea and, under the government s Enterprise Investment Scheme, anyone investing between 500 and 1m in a qualifying business will have the added incentive of becoming eligible for income tax relief, worth 30% of the amount invested. From 6 April 2012, investors pledging between 500 and 100,000 in a qualifying start-up will benefit from 50% relief, under the Seed Enterprise Investment Scheme, which was announced by the coalition in the 2011 Autumn Statement. Is crowdfunding right for all start-ups? Crowdfunding works best for start-ups that have a story to tell whether a personal reason for starting the business, a passionate vision for what it could become, or a social mission. People have to feel inspired to invest so you need to write a charismatic pitch to get potential investors pulses racing, or else display evidence of outstanding innovation. If you have a mundane or complicated concept which the public will struggle to connect to, crowdfunding may not be right for your start-up. However, any business can succeed with the right pitch the key to crowdfunding success is: keep it simple. What if someone copies an individual s of business s idea? There is always a risk of copyright infringement when you release your concept into a public domain, such as the internet, before you launch. However, the chance of someone copying your idea shouldn t be any higher through crowdfunding than in the period between launching and your business becoming well-known. Also, because of the scope for crowdfunding to raise awareness of your business, if your idea is original it may actually gain a reputation as the first of its kind deterring copy-cats.

14 It is important to remember that the nature of a crowd is, not everybody will agree. Some people may think that your idea is flawed, which may further safeguard it from imitation. What happens when a business reaches it s crowdfunding target? As with most business deals, when your online target is reached there will be a short cooling-off period. Investors will be asked to confirm their investment and those who can t follow through may be given the option to withdraw their pledge. The crowdfunding platform will then refer the case to their lawyers, who will formalise the deal and the money will be transferred to your bank account. You will be given the details of your investors, so you can liaise with them directly and begin processing their rewards. If you are offering equity, investors may be sent a certificate detailing their shareholding. How involved will investors be in my business? If you are using a reward-based platform your commitment to your investors officially ends when their rewards are delivered. However, the more involved you keep them in your start-up, the more they will support and endorse your business as it progresses. You may wish to create a mailing list to send them newsletters or seasonal discounts to maintain their interest. The same principle applies if you crowdfund through an equity-based model, although you may also want to include evidence that you are delivering on forecasted growth and meeting financial targets. In the latter case, you do have some level of responsibility to your investors, however you shouldn t be concerned about interference with the day-to-day running of your start-up. Depending on how much equity you released, generally each investor will only hold a point of a percentage stake in your business. What are the best tips for crowdfunding success? Key to successful crowdfunding is understanding the commitment the process entails. Crowdfunding can provide a fantastic opportunity for small businesses, but it should not be entered into lightly and, to be successful, requires a careful strategy. Make sure you have the resource in place to promote your pitch daily, as well as take every phone call and answer every from potential investors. You need to create and maintain momentum to meet your target. Prior planning is crucial how are you going to create a buzz around your business? Find out who your potential customers are and court them for several months before launching your pitch, finding out what kinds of rewards would entice them to invest. That way, when you launch the crowdfunding, people will be excited and you can get your business off to the best start.

15 Advantages Online lender. Retain control, and a cheaper source of finance Loans are open to individuals who own a business and businesses. The loans/investment are flexible - you only borrow what you need It's an easy but time consuming process. Disadvantages You are likely to be required to offer personal guarantees. Need to service loan repayments immediately. There is always a risk of copyright infringement when you release your concept into a public domain, such as the internet, before you launch. However, the chance of someone copying your idea shouldn t be any higher through crowdfunding than in the period between launching and your business becoming well-known. If you re interested in raising finance using crowdfunding Click here to contact me for more information and hear how I can link you up with a crowdfunding platform. Other Ways to Fund Cash-flow Firstly can the terms of trade with your suppliers be extended? Often businesses are paying on Pro-forma. Once some trading history has been built up it is usually possible to agree improved terms ie 30 days or longer. Just simply taking longer to pay your supplier can damage your relationship or even affect your credit history and rating when you try to get other products or services on account. Invoice Discounting This is also often known as factoring. The finance company inspect your books and agree to pay a percentage of the value of invoices that you send to your regular clients at the time you issue them and pay the rest of the value when they get paid after their charges are taken. They can either run your debtor book for you chasing the payments or you can chase payments. Obviously in the first case it relives you from that time consuming and some times uncomfortable chore but the cost are higher and you may feel that your clients might not like someone with whom they do not have a business relationship chasing them form money. Asset Based Lending This is a similar form of financing and the finance company agree to provide you with a percentage of the value of your sales even before you invoice, this is especially helpful to businesses who do not invoice until the end of the project. This allows manufacturing businesses or other industries like builders to fund the cost of materials and labour or other processes which extend the time before the business gets paid.

16 The finance company inspect your books and agree to pay you a percentage of the value of the sales. Debts can be secured against stock, machinery, premises, invoices and even brands. Invoice Auctioning This is a very new form of Invoice Discounting. It is ideal for business owners who do not wish to provide personal guarantees. You can find out more about the process by visiting Advantages With MarketInvoice, businesses can use the online marketplace to: Sell invoices as often or as little as they want, only paying transparent transaction fees on invoices they successfully sell Create auctions where multiple buyers compete against each other to advance the highest amount of cash at the lowest fee Obtain pricing per invoice, rather than unilaterally across all their debtor book Drive funding costs lower over time once they have built up a successful trading history in the marketplace Avoid company debentures and personal guarantees The MarketInvoice buyer community is comprised of sophisticated investment professionals, who are among the world s leaders in the pricing of risk. This means they are better able to generate pricing for the specific invoices of a business which might be miss-priced or turned away by traditional funding sources. Disadvantages Must be a UK limited company or UK limited liability partnership which: Sells goods or services to large end customers (business-to-business transactions). Have at least 6 months trading history (will consider accepting start- up companies within certain industries and which satisfy particular criteria). Passes the Marketinvoice financial and anti-fraud qualification process. How to finance assets There are two main ways you can pay for the resources and equipment your business needs: buy it outright hire purchase or lease Buy an asset outright If you decide to buy an asset outright, you will own it straight away. Buying outright is a good option if you have the capital available, or if it is essential that you own the equipment. However, this large capital expenditure can affect your cash-flow.

17 Hire purchase or lease Paying for goods on hire purchase or leasing equipment: allows you to use an asset over a fixed period in return for regular payments lets you choose the equipment you require, with the finance company buying it on behalf of your business makes your business responsible for the maintenance of the asset If you lease the asset, a finance company buys the equipment on behalf of your business, and you pay for the asset in regular instalments over a fixed period of time. These smaller payments will leave you with more cash, but due to the interest rates on the instalments, you will pay more for the asset in the long run. Leasing means you may never own the asset outright, although some lease arrangements let you buy the asset at the end of the agreement. However, you can often update your equipment without the expense of buying newer models. The business can generally deduct the full cost of lease rentals from taxable income as a trading expense. On leases up to five years, and in some cases up to seven years, the leasing company claims the capital allowances and should pass on the benefit to you in reduced rentals. You need to check the current rules on capital allowances at the time of arranging a lease. With hire purchase, the business owns the asset once all the payments have been made. You can also claim capital allowances against tax from the beginning of the hire purchase contract. Another advantage of hire purchase is that the interest rate you pay will be less than if you needed to get a bank loan or overdraft to buy the item outright. Types of leasing There are different kinds of lease arrangement. It makes sense to look at each one to see which is best suited to your business, your particular circumstances, and the asset that you are acquiring. The three main types of leasing are: Finance leasing A long-term lease over the expected life of the equipment, usually three years or more, after which you pay a nominal rent or can sell or scrap the equipment - the leasing company will not want it anymore. The leasing company recovers the full cost of the equipment, plus charges, over the period of the lease. Although you don't own the equipment, you are responsible for maintaining and insuring it. You must show the leased asset on your balance sheet as a capital item, or an item that has been bought by the company.

18 Leases of over seven years, and in some cases over five years, are known as "long-funding leases" under which you can claim capital allowances as if you had bought the asset outright. Check the current rules on the HM Revenue & Customs (HMRC) website. Operating leasing A good idea if you don't need the equipment for its whole working life. The leasing company will take the asset back at the end of the lease. The leasing company is responsible for maintenance and insurance. You don't have to show the asset on your balance sheet. Contract hire Often used for company vehicles. The leasing company takes some responsibility for management and maintenance, such as car repairs and servicing. You don't have to show the asset on your balance sheet. The pros and cons of buying equipment outright Buying equipment outright may at first seem like the best option, but it's always a good idea to think about whether this makes best use of your working capital. It may be more cost-effective to rent or lease certain items. Advantages of buying equipment outright: you own the asset and it can't be repossessed - unless it has been used as security for a loan you are treated as the owner for tax purposes and can claim your own capital allowances you don't tie your business into inflexible medium or long-term agreements which may be difficult to terminate you will almost certainly pay less overall than you would through a lease or hire purchase agreement, although you may need to borrow in order to make the purchase Disadvantages of buying equipment outright: you have to pay the full cost of the asset up front out of cash which can affect your cash-flow if you use an overdraft or loan to fund the purchase it will add to the cost and can be withdrawn at short notice, with early repayment of the loan demanded a small company is unlikely to get the same deals on price as a large leasing company, and may not have the same product knowledge and experience it is more difficult for businesses to plan for the medium and long term you can't easily spread the cost to coincide with money coming in to the business you are entirely responsible for the maintenance of the asset you won t be able to take advantage of the tax benefits of deducting the cost of rental from your taxable income

19 the value of the asset may depreciate over time and be worth less than you paid for it you take on all the risk if the equipment breaks down or needs replacing The pros and cons of leasing or renting business equipment Leasing or renting an asset means you can free up working capital for use in other areas of your business and you don't need to take out large loans to pay for it. You should think about leasing or renting equipment that has high maintenance costs, can quickly become outdated, or is only used occasionally. Some advantages of leasing or renting equipment: you don't have to pay the full cost of the asset up front, so you don't use up your cash or have to borrow money you pay for the asset over the fixed period of time that you use it as interest rates on monthly rental costs are usually fixed, it is easier for your business to forecast cash-flow you can spread the cost over a longer period of time, and ease your cash-flow by matching payments to your income the business can usually deduct the full cost of lease rentals from taxable income you won't have to worry about an overdraft or other loan being withdrawn at short notice, forcing early repayment if you use an operating lease or contract hire, you may not have to worry about maintenance the leasing company carries the risks if the equipment breaks down the leasing company can usually get better deals on price than a small company, and will have superior product knowledge on long-funding leases (over seven years, and sometimes over five years) you can claim capital allowances on the cost of the asset Some disadvantages of leasing or renting equipment: you can't claim capital allowances on the leased assets if the lease period is for less than five years (and in some cases less than seven years) you may have to put down a deposit or make some payments in advance it can work out to be more expensive than if you buy the assets outright your business can be locked into inflexible medium or long-term agreements, which may be difficult to terminate leasing agreements can be more complex to manage than buying outright and may add to your administration your company normally has to be VAT-registered to take out a leasing Agreement when you lease an asset, you don't own it, although you may be allowed to buy it at the end of the agreement The tax implications of buying and leasing equipment Capital allowances allow you to offset the cost of capital assets against the taxable profits of your business. Capital allowances are used instead of normal accounting depreciation, which you cannot offset against tax. They are defined and set by HM

20 Revenue & Customs (HMRC) and they are often used as a way of encouraging certain types of investment. If your business is profitable you can claim your own capital allowances by using hire purchase or buying assets outright. Decide whether to lease or buy assets With hire purchase agreements, your business is treated as the owner of the equipment and so you can claim capital allowances, offsetting the asset against your tax bill. You can also claim capital allowances if the lease is a long-funding lease - more than seven years, and in some cases more than five years. If your business reaches a low profit or loss, it may not be worthwhile claiming the full capital allowances. With shorter leases - less than five years and sometimes less than seven - the leasing company will claim the capital allowances against its own profits and should pass on the savings to you in reduced rental charges. Businesses can usually deduct the full cost of lease rentals from taxable income as a trading expense. Investment from Business Angels or Venture Capital Funding. Other options include outside obtaining investment from other sources such as Business Angels or Venture Capital. Business Angels So what are Business Angels? Business angels ( BA s ) are independently wealthy individuals who invest in highgrowth business in return for a significant equity share in the business. In addition to money, BA s often make their own skills, experience and contacts available to the company. Because of the risk to their funds, investors expect a higher potential return than for safer, more secure investments. Equity finance is a suitable option where the nature of a business or project deters other debt providers, e.g. banks BA s will typically invest in businesses with: an investment requirement of between 10,000 and 250,000. who have the potential for generating a high return for the BA s are not averse to high risk scenarios good early stage development or expansion a presence in a particular sector. If a business successfully attracts a business angel investment, they're likely to find it easier to secure further funding from other sources. The questions business owners should ask themselves include: Are they prepared to give up a share in their business and some control?

21 Investors expect to monitor progress and most will want involvement in significant decisions. Are the owners and their key people confident in the business 'product/service? Does the product or service have a unique selling point that singles it out? Do they have the drive to grow the business? What industry experience and knowledge does the management team have? Is there a variety of skills required to grow the business? After considering the above, owners should seek advice from a professional adviser. The advantage of using a business angel is that they often make an investment decision quickly, without complex assessments. However, owners will still need a professional and tailored business plan. Most business angels can bring valuable first-hand experience of either working in a small business or running their own business venture. They're also likely to have local knowledge, as they tend to focus their investments within a small geographical area. Advantages Some BA s may be eligible to have their investment funds matched by the UK Government under its Enterprise Capital Funds (ECF s) scheme. ECF s are commercial funds, investing a combination of private and public money against a share of equity in small high-growth businesses seeking up to 2 million of equity finance. Disadvantages There are of course disadvantages, business angels don't make investments very regularly and may not be actively looking for an opportunity, so they may be difficult to find. While you may decide to approach use an adviser to help you with this link up, business angels will place a lot of emphasis on the chemistry with the owner and how well they can work together directly with the owner and the management team. Tracking down the right investor may take longer than expected and can typically take several months but business owners can short cut this by working with an experienced consultant. A consultant experienced in working with Business Angels and Venture Capitalists will guide a business owner through the minefield and help to get a business investment ready, helping to prepare an tailored business plan and to prepare the business owners for a presentation or elevator pitch. The TV series The Dragons Den gives a flavour of the presentation process but of course it not entirely accurate as the Dragons don t get the business plan and a lot of dramatic licence is used. A pre production process sifts applicants and someone reads the business plans.