Money, money, money must be funny in a rich man’s world, sang Abba. Adam Bernstein explains why financing – or the lack of it – isn’t so funny when you can’t get your hands on it.
FROM premises, staffing issues, dealing with local competition, to HMRC, sourcing product and coping with inflation, there’s much to think about when running a flooring contractor company. But one source of worry for many, understandably, is how to keep the financial plates spinning… and in particular, where to source the funding necessary to keep the doors open.
Bob Hope, the late American comedian, once said ‘a bank is a place that will lend you money if you can prove that you don’t need it’. (If you don’t know who he is, Google him, he was one-in-a-generation). His point, while comedic, is well made and very much true – banks are reluctant to help those most in need.
So, where can a firm go to get the monies it needs? What follows, while simplistic, shows there are options, and not all are that obvious.
The high street
The first stop for many is often a bank loan from a high street bank. Interest rates vary and the banks may well, depending on circumstances, be competitive. However, they will invariably impose strict qualifying criteria and requirements – often demanding three years’ accounts – which can be hard to meet when finance is needed for a start-up.
Challenger banks such as Starling, Acorn and Cash Plus, are alternatives and shouldn’t be ignored because they’re not on the high street. There’s a good guide to them at http://tinyurl.com/38kzjxw4.
A business loan can be of use to those wishing to expand, hire employees or invest in equipment. A loan is a relatively inexpensive form of borrowing compared to other methods such as using a credit card and comes with flexibility in terms of both repayment terms and the amount that can be borrowed.
Loans are better than overdrafts (attached to a current account with a set limit) as they are not repayable on demand. Importantly, loans can be used for almost anything from expansion to the acquisition of new equipment.
On the flipside, to be granted a loan the firm will need to provide a business plan, its owners as well as the business needs to have a good credit rating, and personal guarantees as well as security may be needed.
Sight shouldn’t be lost of the fact that personal guarantees make borrowers personally liable if the business defaults on the loan. Good legal advice before giving a guarantee is essential. However, where a guarantee is given, or security offered, interest rates will be lower.
An alternative to an overdraft is what is known as a revolving credit facility. This allows businesses to borrow, repay and then reborrow when needed over the agreed term. It’s great for emergency purchases and everyday costs. However, they tend to only run for six months to two years.
Online lenders
Another option is to look online for immediate and short-term loans. Google has links to plenty of such firms including Funding Circle, Swoop Funding, and Everyday-loans. Each varies in what they offer, but these lenders provide money that can be used to pay for materials, staff, equipment, or a van, as well as for the paying of tax bills and VAT.
It’s important to note that these funders loans run, typically, for between three and 18 months. They are simple to apply to, fast to respond and could well be more in tune with the demands of those with poor credit ratings, that have a thin credit file (not poor, just with little information) or for higher risk situations. The downside is that those needing this funding will pay more for the facility as interest is tied to risk, and of course, the repayment term is short.
Asset-based finance
Good plant and equipment is the key to running a successful firm. But such equipment – vans, floor grinders, shot blasters, or saws – doesn’t come cheap.
In this instance firms might consider asset-based finance where lenders fund 80% – 90% of the price of expensive pieces of equipment via a loan that is repaid over a fixed term with interest. Depending on the agreement, the contractor may own the equipment once the original loan has been repaid.
It shouldn’t be a surprise that asset-based finance comes in several flavours.
The first is a finance lease which involves the renting of equipment in return for a fixed monthly payment.
Then there’s hire purchase (also known as lease purchase). This is akin to the first option but with the exception that the borrower ends up owning the equipment once repayments have been made in full and the contract has ended.
Lastly, there’s contract hire which often is used for the acquisition of vehicles with payments spread over the agreed term of the contract.
It’s often thought that for a start-up asset-based finance is the best option for plant and equipment – certainly when compared to the high street bank loan. This form of borrowing makes budgeting easier because of the fixed monthly repayment. Further – and this is equally important – repayments can be offset against the firm’s tax bill along with capital allowances to further lower a tax bill.
As before, the amount that will be advanced and the interest that will be applied will depend on the applicant’s credit score.
Overall through, asset-based funding is a quick way to acquire equipment and can lead to the business gaining an asset at the end of the term. However, it should be remembered that the equipment becomes security for the loan and will be removed by the lender if payments aren’t kept up.
Business credit cards
Mentioned earlier, credit cards are – as in our personal lives, easy and fast to access forms of finance. Ad hoc purchases – fuel, stationery, small pieces of equipment suit credit cards well. However, and this is essential to keep in mind, they are very much short-term in outlook and carry punitive rates of interest if the borrowing is not repaid before the statement due date. However, with the advent of online it’s very easy to keep tabs on spending.
There are bonuses in using a business credit card for spending. Used correctly – that is, bills are always cleared on time, they can be used to build or enhance a credit rating which in turn may lead to successful loan applications for large sums; and they often come with large credit limits so when a short-term need arises, there’s no need to apply for further funding. Even better, some give points or cashback on spending.
However, in contrast to other forms of funding, they carry high rates of interest and come with lower levels of facility – borrowing – compared to a traditional loan.
Again, Google offers a window onto what is available as do sites such as money.co.uk and gocompare.com. But as well as the usual suspects – Bank of Scotland, HSBC, Lloyds and Santander, there are names that may well not be so well-known including Capital on Tap, Payhawk, Juni and Danske Bank. Credit limits range from £3,000 to up £2m (Juni) or more.
Government-backed start-up loans
An unlikely option few consider, especially if the business is brand new, is a government-backed start-up loan from the British Business Bank. This, in essence, is an unsecured personal loan of between £500 and £25,000 with, and this is central to its utility – no personal guarantee.
On top of that, if there are several business partners involved in the firm, each can apply in their own right for funding – but to a maximum of £100,000 per business.
Applicants can even apply for a start-up loan when they are buying an existing business, even if that business has been trading for more than three years under different ownership, provided the applicant has personally not owned the business for more than three years. Loans can also be used to buy a franchise.
There is qualifying criteria to meet: Applicants need to be starting a new business or buying one that has been trading for up to 36 months; unable to secure finance from other sources (self-declaration); the business type and loan purpose must be eligible (contractors are, but debt repayment, for example, is not), and applicants must pass a credit and affordability check.
There is a fixed interest rate of 6% per annum and loans can be repaid over periods of between one and five years. There is no application fee and no early repayment fee. Applicants also receive free guidance on writing a business plan and up to 12 months’ mentoring.
It’s worth noting at this point that a firm may be able to tap into other finance and support depending on use case and region. There’s a searchable page on the government’s website, https://www.gov.uk/business-finance-support, and for example, BCRS Business Loans can offer loans of between £10,000 and £150,000 to businesses in the West Midlands that cannot get funding elsewhere.
Merchant cash advance
Lastly, something else to consider is a merchant cash advance which is useful where a contractor takes card payments. Simply put, the funder advances a lump sum to the borrower in exchange for a percentage of future card payments made by clients. The bonus is that the borrowing is unsecured – personal and business assets are not on the line if repayment isn’t made.
Summary
As noted earlier, this is an overview of what is available. Owners need to apply themselves and devote some time to researching what it is they need and who might supply it. The information is all out there on the web.
Adam Bernstein is an independent columnist
