There are many ways to invest, but good advice is key. Flooring companies need to hunt around for the best option for them – direct or via a broker and make an investment based on good advice. Adam Bernstien elaborates.
BUSINESSES need to develop. New equipment, more working space, and general refitting are hallmarks of a firm looking to progress. But such advancements come with cost which leads to a natural question – how to finance such investments?
For many, the simplest route is to use ‘spare cash’, but that’s not necessarily the cheapest form of finance available. In fact, firms shouldn’t use working capital or overdraft for this purpose; long-term assets should be supported by long-term finance.
Lowest cost options
In particular, many believe that anything to do with the structure of the premises is best funded by a bank loan with the term of the loan agreed in line with the size of the requirement. So, if a business is, for example, extending, banks will normally agree that the loan be repaid over 25 years.
But where equipment is required, loans should be taken in line with the useful life of the asset. Investment here usually involves speaking to asset finance, HP or leasing providers.
And this is what David Angus, Braemar Finance sales director, recommends. He encourages his clients to fund over terms that align with the economic life of equipment. But on top of that he’d ‘also consider the income generation or cost savings that the equipment will provide and seek repayment structures that help match the cash flows’.
Overall, though, debt structure should generally reflect the asset being financed… no one would buy a car over 25 years, but they would buy a property over this term. The purpose of the debt should always be the main driver when looking at term.
It’s important not to pigeonhole any finance house as, say, an asset funder only. Angus, for example, says Braemar ‘can provide unsecured business loans to help fund fit outs, building updates, or most other business needs including cashflow and tax loans, partner buy ins or business acquisitions’. Further, he says that ‘facilities are available to new starts and established businesses’. And then Braemar can help with commercial mortgages via another part of the business. In other words, it serves to ask about the entirety of an offering.
Another way to tackle the need to finance is to use two loan facilities with one running over a short term to cover the immediate requirement, and the other over a longer term to spread the cost of repayment.
Even so, the tax implications of funding equipment through a hire purchase or finance lease facility do differ. And in Angus’s experience, most firms still prefer to use hire purchase ‘as it ensures ownership of the asset passes to the business at the end of the term’.
But for other needs, such as fit outs, where there is potential for variable costs, it’s important the business has sufficient facilities to meet the project costs. Here Braemar would make funds available to draw down in tranches, so the firm only needs to borrow when certain milestones are reached.
Funded through unsecured loans, Braemar, as an example, would aim to provide seven-year terms ‘which,’ says Angus, ‘provides a lot of scope to manage replacement cycles of equipment and projects’.
Something else to consider is a consolidated loan. Here a bank lends a round sum for less specific purposes and where the loan is partly for equipment and partly for capital purposes to overcome an impending cashflow problem. An example of this is a tax bill, VAT, and monies needed to repay a supplier in order to obtain maximum discount – just at the same time that a new piece of kit is needed.
Of course, deals depend on cashflow and the financial resources of the borrower. But regardless of the tack taken, firms should look out for any costs relating to early repayment of part or all of the loan.
Interestingly, some think that the big four banks do still have a role to play when it comes to finance but note that finding the right person to talk to is the main problem. It’s for this reason that some use a credit broker to help them cover the field without doing the work themselves.
It’s important to remember that the role of the broker is to represent the client not the bank. From experience, a good broker will know the market and which bank is looking to expand its portfolio at any given time. Finance, like most things is cyclical and as one bank looks to be positive in its approach another will rein back.
A changing market
So, with the economy being less than buoyant, it’s fair to ask if lending is more expensive or harder to obtain.
Given the current economic landscape, there is no doubt that the markets appetite to lend has been diminished. However, some sectors have a historic resilience to recession and so the banks and other funders feel comparatively protected and are still prepared to lend. Vets, opticians and dentists are likely to be seen as more resilient whereas retail and construction is less so. In other words, it’s a sector-by-sector problem.
It’s a given that lending is more expensive as a result of the rises in the base rate. However, costs can potentially be cut by a broker who will negotiate with lenders. Indeed, a borrower that goes directly to their own bank is unlikely to be offered the keenest rate.
One other thing to watch for, if a broker is the preferred option, is a service that demands no fees.
Making the process smoother
When making decisions on applications lenders and finance houses take the applicant and application into consideration.
If an established business is borrowing, lenders will look at the client’s track record and ability of the business to generate cash. Considering that the first and last concern of a bank should always be about the ability of a business to service debt robust financial information from the borrower is paramount.
Key indicators are whether accounts are produced in a timely manner, management accounts current, tax affairs up to date, and if any previous borrowing was repaid on time. The answer to all these questions will have a direct bearing on whether a bank will support a business; a well-produced business plan covering pertinent areas of the business is the key to getting the bank credit department on side.
From Braemar’s perspective, Angus says that the information his firm requires depends on the size and complexity of the request as well as the applicant. He says, though, that ‘we would generally expect to be provided with recent bank statements and financial statements to support a credit application. In certain situations, we may also ask for forecasts or projections, particularly if the business is making a significant investment relative to the size of the existing business.’
If funds for a start-up are sought, a business plan is even more vital. This should cover those areas that a bank will want to assess – the background of the individuals, their personal credit record, and a reasoned assessment of the demographics of the start-up area.
As to why business plans are helpful, Angus succinctly explains that ‘they allow us to assess the viability of a proposal.’ He comments that ‘a good plan will include background on the key stakeholders in the business, key services, business and financial objectives along with financial forecasts and projections.’
While Angus notes that accountants can help construct a business plan, he says that ‘our area managers can also give guidance on the detail required relative to the actual request.’
A word of caution though: Banks commonly pushback when borrowers are reluctant to put in their own money. A broker can help to negotiate the delicate balance between how much is put down and how much is held back.
Allied to this is the matter of security. Personal guarantees and second charges are all part of the armoury banks use to protect their own position. Again, brokers can negotiate on clients’ behalf.
Tax breaks
Budget 2023 brought in full expensing so that companies can now claim 100% of the cost of certain plant and machinery against profits in the year of expenditure, effective from 1 April 2023 to 31 March 2026. This generally applies to spending on plant and machinery and excludes cars and items classed as integral features within buildings.
Expenditure on integral features or other special rate pool assets will instead qualify for first year allowances at a rate of 50% over the same time span. The rest will be written off at 6% per year.
These rules only apply to companies. Partnerships and sole traders have different rules.
Given the complexity of tax law it makes sense to not only break down acquisitions and claim the correct relief but also, seek specific advice from accountant.
Summary
There are many ways to invest, but the key is good advice. Firms need to hunt around for their best option for them – direct or via a broker and make an investment on good advice.
Adam Bernstein is an independent columnist
