Structuring Business Finance : Let The Problem Be The Answer

If your business requires funding it is important that you get the structure right. This is a fairly simplistic approach but I always think it is a good idea to let the problem dictate the type of funding you will require. Let's take a look at what I mean by that.

Are slow paying customers causing you a cash flow issue? If that is the case you will have outstanding invoices that you can borrow against. Those outstanding invoices can be turned in to cash by using invoice finance. This can be an excellent form of working capital.

Do you need cash to buy new machinery? Use the machinery as the security and structure an asset finance deal over the life of the asset. Hire purchase or finance leases are great forms of funding that use the asset as security and reduce the need for directors guarantees.

Have you received a large order that seemed like the dream order but quickly turned into a nightmare when you realised you need to pay the supplier upon shipping? Trade finance can fund against purchase orders and used alongside invoice finance it can finance the full trade cycle from customer order through to customer payment.

Do you require vehicles? Again you can use hire purchase or finance leases but you can also opt for contract hire. The options available for funding vehicles use the vehicles as security and minimise the requirement for guarantees. They can also offer tax advantages.

If you are looking to buy property then a more obvious answer is a commercial mortgage. This is long term funding secured against bricks and mortar. I feel like I am stating the obvious with this one but added it for completeness.

Common Mistakes

Some of these suggestions may seem obvious. However, all too often I speak to people who are not sure how to raise the required funding or have made some common mistakes. Those mistake may include:

• buying machinery or vehicles using working capital facilities such as overdrafts or invoice finance
• using unsecured loans to buy assets. This means the funding is secured against personal guarantees rather than the assets
• buying equipment with loans longer than the useful life of the asset. The asset is on the scrap heap and you are paying a loan on an asset that no longer generates income.

This is meant as a rough guide. There will always be anomalies.

This perhaps covers the basics of choosing the type of finance product. However, that is just the starting point as the structure of individual products is incredibly important. Especially with invoice finance. I say that because it has the most variables and if structured badly it won't generate cash as you would want it to. I will bore you with that another day. The insomniacs amongst you will be waiting with bated breath for that one!!