Raising the Right Type of Finance

Raising the Right Type of Finance

By Jeremy Webb

When thinking about approaching your bank for finance, stop and ask yourself the following questions:

• Do you have a relationship with your bank?
• Do you think your bank manager has no discretion?
• How do I run my account?
• What does this tell the bank about me and my business?

You may not think it is important to have a good relationship with your Bank Manager for a number of different reasons, they always change, they are only at the end of the phone and don't know me, why should I? I am the customer.

A good working relationship with your Bank Manager can greatly assist you if you apply for finance. Ideally work on this before you need to borrow! After all, if they know you, your history and approve of the way you run your account, these should be positives together with a greater understanding of your business and your need for the requested finance. Don't believe that a Bank Manager has no discretion, they may not be able to say yes instantly, but they can always say NO! If they do, your application will go no further.

The next questions that need to be thought about are:

• What do I need?
• When do I need it?
• How will I use it?
• How will I repay it?
• Can I borrow from family or friends?
• Would I lend MY money to this business is the way proposed?

When thinking about what you need, always err on the safe side. It is always best to build in a contingency and to apply for more than the bare minimum you think you require. Much better to do this than to have to go back to your bank and request more because you got your figures wrong or other circumstances which you should have allowed for have changed.

The last question is an important one. Look at your proposal closely and decide whether or not you would lend your money on the basis requested if you were being asked to do so. If you decide you would not then why should anyone else?

Match the type of facility you request to the purpose for which your are borrowing.

For buying freehold property, you will want to consider a commercial mortgage over a long term arrangement of ten to twenty five years for example.

If you want to acquire vehicles, a lease or loan over the approximate working life of the vehicle, say two to five years, would probably suite you better, or alternatively, you may want to consider a contract hire agreement.

When thinking about the acquisition of plant and equipment, a lease may be appropriate, or a loan over the working life of the asset. Of course, if you will not need the equipment all the time, it may be better to hire it on a day to day basis as and when you need it.

If the purpose of your request is to fund working capital, there are several options available. You should carefully consider these and reach a decision about which one best fits your need and purpose based on your answers to the questions above:

Overdraft: Traditionally this will be covered by three times your debtors with debts less than ninety days old but be careful, you may be required to provide additional security.

Invoice discounting: Typically 70-90% of debtors less than ninety days. Confidential or disclosed- you manage your debtor book.

Factoring: Typically 70-90% of debtors less than ninety days. Here the provider will normally take on managing the sales ledger and debtor collection.

Enterprise Finance Guarantee Loan: not a panacea for all ills. Bear in mind that a traditionally secured loan will normally be covered 1.5 times by security. The Government guarantee is for half of this only, so.......

Stocking Facility: often used to fund car dealership stocks of new / used cars

Import/Export Finance: a specialist area

Funding losses: Forget it if you are an SME unless it is a regular seasonal issue such as the problems faced by B&B's during the Winter months when booking drop off but overheads remain constant. To solve this, you may be able to obtain overdraft facilities which change depending on the season.

How much? Make sure it's enough!

GOING BACK FOR MORE IS NOT RECOMMENDED AND DAMAGES CREDIBILITY

Once you've decided what you require to finance and how much you need, what are your options of who to approach?

• Your own or another bank – Normally, start with your own bank first
• Specialist asset or trade finance houses
• Manufacturers finance deals
• Government guaranteed schemes

Equity

• Business Angels
• Private Equity or Venture Capital Houses

Please note this is not a transcription of the presentation at Entrepreneur School Chelmsford on 11th November

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How Webbery Solutions can help steer you through the storm.

• First meeting free – Mi Members get 2 hours rather than the normal 1
• Financing Health Check
• Help to prepare a credible Business Plan.
• Discount of 20% for start ups and micros £100k on the cost of the plan
• Write a proposal for your bank
• Assist in presenting the proposal to your bank and another

For more information
E mail - success@webberyassociates.co.uk
Call 0845 468 1468