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Business Finance Options

A major complaint from our SME clients is that they are under-financed. Whether it's cash flow, overdraft limits, debtors or creditors, these are all integral to the profitability (and potentially the survival) of your business.

There are lots of ways an enterprise can raise finance. The main options are reviewed below. Some will be better for you than others. You need to choose the most appropriate method depending on your particular company's circumstances, style of operation, products and services and market potential. This is where an Alakar advisor can help to guide you through the complexities, save you time and money and help you avoid expensive mistakes.

1. Arrange an Overdraft with your Bank

The most popular way of raising finance, this is not always the best for your business. All banks have strict rules about granting overdrafts. Your local branch Business Manager will want to see evidence of the following:

  • A comprehensive business plan
  • Your ability to service the overdraft and how you can repay it
  • How the money will be used
  • For what purpose the overdraft facility needs to be arrange
  • What security you have to offer the Bank against the loan
  • What financial control you have over your company
  • Management accounts

There may be additional conditions and restrictions, depending on the particular bank you are talking to.

2. Invoice Discounting and Factoring

Invoice discounting and factoring are reliable sources of working capital that grow as your business grows. In essence you raise an invoice to one of your clients and instead of waiting 60-90 days for payment, invoice finance provider will pay you almost immediately, minus their charges.

Invoice discounting is where you keep control of your own debts and factoring is where the factor collects the debts for you.

There are two main charges: the first charge is for borrowing the money, the discount rate and is expressed as a percentage above base rate; the second is a service charge and is expressed as a percentage of turnover. The service charge for factoring is higher than for invoice discounting as the factor is performing your credit control and doing more work. Either is a good way of avoiding the difficulties of clients paying you late. It is flexible finance linked directly to your sales, but it is expensive and we recommend you explore other routes first. Either way, please contact us to get a specialist recommendation to suit your particular circumstances.

3. Leasing and Hire Purchase

Hire Purchase (also lease purchase) allows you to spread the full cost of an asset over a defined period. At the end of the period providing you stick to the terms of the agreement you will own the asset. Capital allowances may be available as a deduction against your tax bill.

Although a finance lease will look and feel the same as a hire purchase, you will not end up owning the asset at the end of the lease.

4. Payroll Funding

Payroll Funding is a way of obtaining cash against your wage bill. It can sit alongside other types of funding such as sales ledger finance and can be used by creditworthy businesses of any size or sector. In the same way as suppliers free up cash by giving them credit on their supplies, Payroll Funding frees up cash by giving you credit on your wage commitment. No personal guarantees are required.

5. Enterprise Finance Guarantee (formerly SFLGS)

The Enterprise Finance Guarantee (EFG) is a Government intervention launched by the Department of Business, Enterprise and Regulatory Reform (DBERR) in January 2009 to take over from the Small Firms Loan Guarantee (SFLG) as the prime support for SME businesses. Its function is to help customers who have a viable business proposition but lack security to access finance via approved lenders. EFG will support lending for business growth and development in cases where a sound proposition may otherwise be declined due to lack of security.

Additionally, EFG is also available to refinance some or all of an existing overdraft to provide working capital, though the overdraft limit must remain in place.

6. Trade Finance

Trade Finance is used when you require additional funding to enable you to purchase the products or raw materials that are needed for your business. It is mainly used for funding imports, when the time period between paying the overseas supplier, the delay while goods are in transit and final invoicing to and payment by your clients exerts additional pressure on your cash flow.

7. Angel Investment

Angel Investment is where you sell shares in your company to outside investors to raise the capital that you need to start or grow your business. You can raise Angel Investment at any stage of your company's development. Angels in general do not want to take control of your business as this will only demotivate the existing management team. The higher the risk, however, the higher the percentage of your business you will have to relinquish. Traditionally start up and turnaround situations will have to be prepared to sell a greater proportion of the company.

Before you consider angel capital, we recommend that you contact an Alakar expert who can guide you through the process and search the market for the most economical and appropriate route for your company.


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