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Gloucestershire Business News

How to determine and obtain the right type of finance to support growth - Martyn Freeman of Azets

By Martyn Freeman, director at Azets 

In today's financial landscape, finding the best funder for your business is more complex than ever.

The breadth of choice is vast and banks and other funders each have different areas of focus, which may change with economic conditions and the rationales for decisions may not be apparent from the outside.

With 60 per cent of UK SMEs looking to invest in their business in the next 12 months and 20 per cent of UK SMEs planning to borrow in the same timeline, it is vital that SMEs are armed with the right information and advisors to ensure the right choice for the business in the months ahead.

Below, director at Azets Martyn Freeman explains the options and what you should consider to help grow your business:

1. Don't limit yourself to high street banks

Most SMEs approach their bank when they need funding but traditional banks are not always able to provide growing businesses with all the finance they need. Change in security requirements, internal capitalisation and lending policies have meant that facilities such as an unsecured overdraft are no longer routinely available. So, you have to look at alternatives and what's best for your needs. The good news is there is a wide range of finance providers available to SMEs. For example, there are the newer digital banking providers, independent finance companies, fintechs, angel investors and private equity funds.

2. Be clear what you need the money for

Business growth can come in many forms so you need to get funding that is most appropriate for your requirements. If you are investing in working capital such as hiring more staff or buying more materials, for example, you will need a different type of finance than if you are buying equipment or bigger facilities.

3. Assess your options carefully

There are two main types of funding for SMEs - debt finance, which involves borrowing money and paying it back over time, typically in regular monthly instalments; and equity investment, in which you offer shares in the business in exchange for investment. The equity investor then owns a proportion of the business and has a right to a share of any profit the business makes and on any capital event, such as a sale.

Debt finance options include traditional loans and overdrafts, invoice finance, in which a provider lends you a proportion of the value of an invoice as soon as you have raised it; peer to peer and third party cashflow lenders, and asset finance, in which the funding is used to acquire new equipment. There are also business credit cards and a range of newer loan options which can be hybrids of several of the above.

Equity finance options include angel investors, private equity funds and crowdfunding.

4. Accept that you may need to sell equity in your business

If your business is growing steadily and generating consistent profits - a manufacturing firm, for example - then you are likely to be able to raise debt finance and pay it back each month in a structured way.

If your business is on a very fast growth curve, however - for example a tech business - it is likely to need a large amount of money early on in its life cycle to develop or scale, which may not generate sufficient profits and cash to make the regular repayments in the near future. In this case selling shares in the business to a private equity fund or angel investor may be more suitable as investors do not seek an immediate return

SME founders can be concerned about how much they own of the business but if selling a percentage to a private equity fund, for example, enables the business to grow faster and ultimately grow value, the founders will end up with a smaller slice of a bigger pie.

5. Take time to understand the pros and cons for each type of funding

The advantage of asset finance, for example, is that it enables an asset to be acquired without the full outflow of cash at the start, repayments are made as the asset produces cash inflows for the business and the fixed nature of the monthly cashflow provides certainty for your cashflow A disadvantage is that the lending is secured on the assets so if repayments are missed, the lender can use their legal charge over the asset to take it back. Asset refinance allows you to turn existing assets you own into cash which is often a popular option to businesses who need additional cashflow to enable business growth.

The advantage of invoice discounting, meanwhile, is it can scale up with the business - as turnover grows, as do the number and/or value of invoices against which funding can be advanced. However, it may not be suitable for some sectors, such as professional services , can be relatively expensive and can come with complicated administration criteria dictated by the lender. Costs are based on the turnover of your company so if you only want to borrow a relatively small percentage, you might consider using a company that funds single invoices rather than a whole turnover facility.

6. Make your business shine to maximise your options

In considering funding options and making applications, you should prepare integrated projections (profit and loss, cashflow and balance sheet) which include the impact of the investment and funding you are looking for; for example, if the investment will increase production capacity, the projections would show increasing sales and the servicing of the monthly repayments. It is also worthwhile reviewing your credit rating and ensuring suppliers are paid on time so there are no late payments in your records.

Top Tips

  1. Carefully consider what you will be investing in and the benefits and risks for your business.
  2. Seek professional advice to help you find the best solution for raising finance. Our team of trusted business advisors can talk you through your options and what to consider based on their experience supporting a range of clients to raise finance for their growth ambitions. We are strategic partners with business lenders such as Fluidly, who provide access to a variety of lenders and funding projects and Propel, who have been providing Asset Finance solutions to UK businesses for 25 years. Our strategic partnership enables direct introductions to their specialists who can support you with their products and services or we can connect you with our network of external lenders to open up more options for you.
  3. If regular repayments may be a challenge at the particular stage of your business, equity funding should be considered. Individual investors can benefit from tax relief through EIS and SEIS schemes if they invest in your business - consider if you know anyone who might be appropriate.

If you would like to find out more, get in touch with Martyn Freeman - email or call 01242 252555.

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