How to finance a growing business.

There is nothing more frustrating than not being able to grow your business due to a lack of cash - you may even be turning away new orders or big contracts because you know you won’t be able to pay suppliers or wages if you take it on.

And a growing business inevitably means more staff, stock, machinery and equipment… perhaps even larger premises - all of which require a lot of cash.

Fortunately, there are plenty of business finance products that are specifically designed to address cash flow issues and get your business growing again.

In this article, I summarise the benefits of the most effective cash flow solutions available for businesses looking to borrow ￡250,000 or more.

Business Loans

Let’s start with the simplest option - a business loan.

A business loan is a loan that is specifically for business purposes.

It can be provided on both a secured or unsecured basis, but for loans of ￡250,000 or more you are almost certainly going to have to put some sort of collateral up as security.

It works exactly like a personal loan; once approved, you receive the funds and then repay it in monthly installments for the term of the loan which is usually 3-5 years but can be up to 15 years.

The main benefits of a business loan are that it provides you with a lump sum cash injection and your repayments are fixed - you know exactly what needs to be repaid each month for the duration of it and you can budget accordingly.

But as a cash flow solution, it is not as effective as some of the other options available to you.

Firstly, as I’ve already suggested, getting a loan of at least ￡250,000 is only going to happen if you have some sort of collateral to offer as security - ideally property.

And it is quite likely that you will be asked to provide a personal guarantee to back it up too.

Not ideal.

And a business loan isn’t very flexible - you borrow a fixed amount, and once it’s gone… it’s gone.

It can’t accommodate the peaks and troughs of a normal working capital cycle so if business really picks up and you need more cash, you’ll have to apply for a new loan (which won’t happen quickly).

Good for: Businesses with a very specific short term requirement.

Business Overdraft

A business overdraft works like any other overdraft; your bank enables you to access funds after your business’ account drops below zero.

It’s a very effective short term cash flow solution.

The overdraft will have a limit that is set by your bank and you’ll have to pay interest (usually charged daily) on the overdrawn balance.

The limit that your bank sets for you will depend on your business profile and whether it is being provided on a secured or unsecured basis.

The challenges with overdrafts are very similar to the challenges with business loans - firstly, obtaining an overdraft with anything like the limit you need is not easy unless you have some collateral to secure it with and/or are willing to provide your personal guarantee.

Most banks are very reluctant to offer overdrafts of more than ￡30,000 without plenty of tangible security to back it up.

And again, whatever the limit is - it is fixed.

If the overdraft facility isn’t big enough in the first place, or you out-grow it over time, it can become hard-core (expensive) debt.

And you just find yourself in the same cash flow predicament again, asking for an increase to the overdraft limit or trying to refinance for extra headroom.

Good for: Steady state businesses with fairly predictable cash flow, that require working capital to cope with occasional ‘pinch points’.

Invoice Finance

Invoice Finance enables you to generate working capital by using your unpaid sales invoices as security.

Technically speaking, you sell your unpaid sales invoices to your invoice finance provider and receive an advance of the gross invoice value.

That advance rate can be as high as 95% but is usually between 60% and 85% (the advance rate varies depending on the type of goods or services you sell).

You receive that advance almost as soon as you raise and issue the invoice so it is an extremely effective cash flow solution.

Instead of waiting 30, 60 or even 90 days for your customer to pay, you receive up to 95% of it almost immediately.

That cash can be used to pay suppliers, wages etc so that you can keep taking on new business.

Unlike a bank overdraft or loan, you will not typically be expected to put up additional security to get the level of funding you need.

The principal security for an invoice finance facility is your sales ledger (or accounts receivable) and you will not normally be asked to support that further with additional collateral or a personal guarantee.

Invoice finance really comes into it’s own with the flexibility it offers - because funding is directly linked to sales, the level of funding available to you grows as your sales grow.

So if your sales double in the next 12 months, your invoice finance facility doubles too.

Contrast that with a bank overdraft or a loan - this is why invoice finance is such an effective funding solution for growing businesses.

Good for: Invoice Finance is a very effective for fast growing and/or seasonal businesses that need a flexible form of funding.

Asset Finance

Asset finance is used by businesses to buy machinery and equipment.

The asset finance provider will purchase the equipment on behalf of the business, and the business will then rent or lease the equipment for a certain period.

The business then makes monthly payments over the agreed period, which is usually the usable life of the equipment.

Asset financing is very useful for businesses who are unable to raise the funding needed to purchase the machinery and equipment they need outright or would like to spread the cost of the asset over its usable life.

There are 3 different types of asset finance available to businesses; Hire Purchase, Finance Lease and Operating Lease.

Specialist asset finance is also available for things like marine, aviation and agricultural equipment.

By using asset finance to acquire equipment, you free up cash to deploy elsewhere by avoiding upfront purchasing costs.

The asset itself is typically enough to secure the facility, so little or no additional security is required.

And, of course, by spreading the cost of the asset throughout its usable life, you improve cash flow and increase the amount of working capital available at any time.

Good for: Asset finance is relevant for any business of any size which is considering purchasing high-value equipment needed to support their continuing growth.

Asset Based Lending

Asset based lending is like the big brother of invoice finance.

With asset based lending, you turn your unpaid sales invoices into cash - quickly - just like invoice finance.

But if you have other assets on your balance sheet such as stock, plant & machinery or property you can leverage them for additional cash flow too.

Lenders will provide you with a revolving cash flow facility against your stock as well as your debtors, and provide additional funding on a term loan basis against the value of your unencumbered plant & machinery and property.

It is ideal for larger businesses with strong balance sheets and is often used for event-driven requirements such as funding an MBO or acquisition.

And because an ABL facility is secured by the value of the assets being leveraged, you can obtain significant levels of funding without having to provide additional security or personal guarantees.

The level of funding made available to you will really only be limited by the value the lender places on the assets they are funding against.

Good for: Asset based lending is well suited to larger businesses with significant working capital requirements, and/or those looking to acquire other businesses or refinance.

Purchase Order Finance

Purchase order finance is a similar concept to invoice finance - but for purchase orders, so much earlier in the sales cycle.

It is designed to alleviate the cash flow problems caused by receiving a large purchase order (a nice problem to have); you need cash to pay suppliers and fulfill the order in the first place, and you might have to wait up to 120 days for your customer to actually pay.

Without finance, you might have to turn the order away.

PO financing can be up to 100% advance against confirmed purchase orders.

The Purchase order will need to have come from a relatively well established and financially secure customer as the lender will want to make sure that the buyer is in a position to pay for the goods once they have been completed.

Purchase order finance often works in conjunction with an invoice finance facility.

Good for: Purchase order finance is an ideal solution for businesses with very chunky purchase orders and protracted sales cycles.

Trade Finance

Trade finance is particularly useful for businesses that are trading internationally.

It is common for exporters to ask importers (those receiving the goods) to prepay for them.

So, for example, you have placed an order for 10,000 widgets from China; the Chinese supplier will not ship them until you have paid up-front or at the very least given some assurance or guarantee that the goods will be paid for.

Your bank or lender will assist by providing a letter of credit to the exporter, or the exporter’s bank.

The letter serves as a guarantee of payment, upon presentation of certain documents such as a bill of lading (essentially a receipt given by the master of the ship to the person consigning the goods).

Good for: Trade finance is a very good way of facilitating international trade and reducing payment risk. Without it, you would find it difficult to source goods from overseas suppliers, or export your goods safely.

Our expert advisors can find you the right finance for your business - so you can focus on growing it. Talk to us today.