guest written by conrad ford [blog]
There are many obstacles businesses need to conquer to succeed. From setup and survival, to stability and expansion — one of the biggest challenges at every stage is cashflow.
Whether or not your business can expand depends on whether you can sustain enough working capital through a period of growth, and if you get it wrong it can lead to serious consequences and even insolvency.
So how can you grow your business without straining cashflow? Every business has a slightly different situation, but many will choose to use alternative finance for their growth plans. There are lots of options in this area — let’s look at a few of them.
unsecured business loans
Unsecured business loans are a good starting point if you want to boost your working capital levels through a period of growth. Many of the alternative lenders on the market are willing to lend more than the banks, and it’s often possible to borrow £250,000 or more if your business is strong enough.
Of course, to get this level of loan you’ll need to demonstrate that your business is bringing in enough revenue to comfortably afford repayments, and the lenders will also want to see good profitability and at least a few years of revenue. Lenders offering unsecured business loans will generally require a personal guarantee too, which means you agree to be personally liable for the debt if your business can’t pay.
For these reasons, unsecured loans aren’t right for everyone, and you should speak to a lawyer before agreeing to a personal guarantee. But if your business is growing fast and has a solid track record, they’re often the best way to supercharge your plans.
finance for your assets
If your growth plans require more specific funding for new machinery or vehicles, the world of asset finance is worth exploring. There are many ways to acquire more business equipment without having to pay a large amount of cash up front, and with options for both renting and buying you can find the one that’s just right for your firm.
Equipment leasing (or ‘contract hire’) is a long-term rental, which means you can get the equipment you need for an agreed period of time without needing a lump sum. When the contract is over, you give back the asset, or you can choose to start a new lease.
While leasing over the long-term is more expensive than buying outright, the key advantage is flexibility. You can add assets to the lease as your business grows, for example to expand a fleet of vans, and you’ll have the option to upgrade equipment to suit your needs. Leasing will often include maintenance and insurance too, so you don’t need to take on any of those burdens of ownership.
Hire purchase, on the other hand, is the formal way of saying “buying on finance”, meaning you make monthly payments towards a purchase price and will eventually own the asset.
If you’re choosing between leasing and hire purchase, one of the main factors is what your future looks like. If you’re confident you’ll need the item for a long time, it’s usually cheaper in the long run to buy it using hire purchase. On the other hand, if your future is less certain it might be worth paying a bit extra for the flexibility of leasing.
regulate your payment terms
Another big factor in cashflow management is payment terms. In other words, it’s hard to pay for a big new project before you’ve been paid for the last one, and this is a problem that affects a huge range of businesses in a lot of different sectors.
You might not think of invoice finance as a form of growth finance, but easing these payment term issues can make a big difference when you’re trying to grow but your cashflow is squeezed.
Invoice finance is based on the money customers owe you, and the lenders in this area advance you most of the invoice value (perhaps 85%) when the invoice is raised. When your customer settles the invoice after your payment terms are up, you get the remaining value minus the lender’s fees.
If your biggest payment gap is caused by paying suppliers, you should also look into trade finance. It’s often used by companies with overseas suppliers, who demand upfront payment or a large deposit before they’re willing to ship any goods.
In these cases, the delay between paying for stock and getting paid by the end customer can be 3 months or more, and trade finance is a good way to close the payment gap at the beginning of the cycle. In fact, many firms choose to combine trade finance with invoice finance, because that way you can minimise the amount of time you’re out of pocket.
using rich management information and forecasting to make the best decision
Whichever of these finance types you’re looking at, if you’re already using up to date rich management information or forecasting with a firm like flinder you’re in a good position. Both up to date rich management information and forecasting can help you make better decisions for growth, particularly when you’re considering external finance.
For example, you could try a range of forecasting scenarios to see what your future looks like with and without finance, or try inputting different loan amounts to work out a few different options.
Overall, with so many funding options on the market and forecasting tools at your disposal, with a little effort you’ll be in a good position to grow your business.
Conrad Ford is Chief Executive of Funding Options, recently described by the Telegraph as “the matchmaking website for small businesses and lenders”. Funding Options has been selected by HM Treasury to help businesses find finance when they’re unsuccessful with the major banks, as part of the Bank Referral Scheme that launched in November 2016. @FundingOptions