With banks still failing to provide sufficient finance to small businesses, Mike Nolan, Academy Leasing Managing Director, considers alternative funding options when the banks say “no”.
Net bank lending to SMEs is still falling according to Bank of England reports – so much so that the government is set to soon make it compulsory for them to refer companies to alternative funding options.
Indeed businesses can still access the finance they need to grow and succeed if they know where to look.
Preserve working capital with lease finance
Investing in new equipment to increase business capacity, drive efficiencies or open up new markets can deliver sizeable returns. Moreover, securing funding for equipment can prove easier than obtaining bank loans, especially if lenders have expertise in your particular industry sector and have relationships in place with suppliers and manufacturers.
Lenders with the requisite market knowledge will be aware of the returns on investment that can be achieved and, as a consequence, will be more likely to approve your application.
In some cases, companies can start to benefit from greater revenue streams immediately, with new equipment being in place before they have been called upon to make a payment.
Furthermore, instead of splashing out on upfront purchase, the process of making monthly payments can help to build up a strong credit history for young businesses and at the same time, free up cash to support growth elsewhere – on new business processes or on marketing activities, for example.
Utilise your hard assets for cash borrowing
Hard assets, such as IT or manufacturing equipment, have a value that can be used to release working capital – and this can be of enormous value if your company’s cash flow is struggling to meet your growth ambitions.
It is often possible for a finance specialist to lend money against existing equipment without the need for further securities if you can demonstrate a solid business plan and are able to service the debt. Lending will usually be arranged based on a reasonable valuation of the equipment and on the amount of serviceable debt.
Such arrangements can even apply to equipment that is still subject to existing finance terms. The financier may be able to reduce monthly outgoings and providing more financial flexibility by spreading the payments over a longer term.
This type of lending can present a particularly attractive option when attempting to fund equipment with limited resale value. Although it may be difficult to borrow money for the equipment itself, the lender may regard it as a safe investment based on the potential ROI.
Retaining business liquidity
The working capital reserves of small businesses can be hit hard by late customer payments. Business overheads still having to be paid but factoring or invoice financing can offer a solution.
Both factoring and invoice discounting provide an advance on future revenues, allowing businesses to access cash when it’s needed most.
In the case of factoring, invoice financiers will manage the company’s sales ledger and collect money from customers. A percentage of the invoice will be advanced up front, with the remainder paid on settlement. Invoice discounting differs in that the financier will not collect any debts but will instead lend money against unpaid invoices as an agreed percentage of the total value. A fee is levied for both services but they do not require personal guarantees.
Borrow to buy
Expansion by acquisition may represent the better opportunity than organic growth for some businesses hoping to expand rapidly or to break into a new market.
In these cases the required funding can be raised against the acquiring organisation’s debt book, hard assets or, sometimes, even the soft assets.
The acquiring company must find the necessary finance to make the deal and make sure there is sufficient working capital to ensure the move does not put both companies at risk.
The additional working capital could be apportioned to the purchase of new equipment to cope with increased demand or to cover the costs of bringing the two companies under one roof.