Alternative finance – what to consider…
We’ve all heard the phrase ‘Cash is king’ but what do you do when you need an injection of cash? What are your options, how do you check your contacts are reputable and what do you need to consider before you make the first approach? It’s all in this episode of BaranovTV!
Hi, and welcome to another episode of BaranovTV, designed to demystify the world of accounts and tax and to help your business grow.
Many years ago it was really easy to get hold of money to finance development or expansion, or other needs within a business. Then we hit the crash in 2008 and everything really became very restricted and it became very, very difficult to get hold of any type of funding.
As the years have gone by, things have changed but it can still be tricky. The banks will lend, but they’re still very considered, and we’ve seen more and more people turning to the alternative funding market. Historically that was looked down on slightly and it was almost deemed as the underworld of finance but that’s really changed.
We’ve seen a lot of people using funders, such as Funding Circle and crowdfunding and so I thought today’s episode we’d talk a little bit about:
- the alternative funding market and the different types of funding that’s available
- what to look for if you’re looking to think about obtaining funds and finance from that market
- what to be aware of and how you can give yourself the best possible chance of a successful application
So we first started looking at the alternative funding markets some years ago but we’ve actually used it for a client recently who didn’t think there was going to be any possibility of obtaining finance. They’d had one big customer who had, over a couple of months, withdrawn from their market, so they’d been left with a really big gap in sales every month. They’d started to have to juggle and they’d been starting to get quite a lot of calls from people that they owed money to; they were actually finding that they were spending more time dealing with those calls than they were in ramping up sales and replacing that big customer that they’d lost. What they needed to do was get an injection of cash to buy them some time and buy them some peace of mind and some peace to be able to replace that lost customer.
So what we did for them was we put them in touch with somebody that we know that we’ve used in the past, who was able to negotiate them a really good deal which is a nice injection of cash over a two year period which enabled them to restructure the business which we’d helped them to do, but also restructure their finances so that they no longer had to be dealing with so many people chasing them. It bought them the time because the business was actually still viable they’d just taken their eye off the ball with this one big customer and they needed time to regroup.
So that’s why I thought that talking about alternative finance might be really useful.
There are lots of different types of alternative finance, and I have a list that I’m going to refer to, because there are so many.
- First off I’ve already mentioned crowd funding, so that is people like Funding Circle where there’s lots and lots of smaller investors and it’s all of those small investors coming to provide the finance that a business may need.
- Unsecured business loans are, as the name suggests, loans made to a business where there’s no security. So they do tend to be smaller amounts over a shorter period of time than their opposite number which are Secured business loans and these are secured against normally, for small businesses, against the family home. Obviously there is a reluctance in doing so in some cases because it can jeopardize the home but it is a way of securing a loan if the business desperately needs it.
- Asset finance, this is usually finance to obtain cars or equipment that the business needs. And sometimes this can be done retrospectively. So within six months of paying out you may decide that you actually want to lease, put the asset onto a lease, and that actually enables you to free up that cash that you already spent, and get it back into the business and get it back working for you. Now, leases, historically, have been quite expensive but actually they’re very, very affordable these days and particularly so if the item that you’re leasing is of value. The more it holds its value, the cheaper that lease would be, as a rule. Obviously not 100% of the time.
- There’s always invoice discounting or factoring of invoices, which gives you instant access to cash that would otherwise be tied up in your invoices waiting for people to pay you. Historically this was always really frowned upon and it doesn’t bode well if an existing supplier sees you factoring your invoices, but if it’s something that you’ve always done then they’re unlikely to actually be in any way concerned. We have a lot of customers and a lot of clients, sorry, that have used it over the years.
- Commercial mortgages, they can enable you to buy property for business use or investment purposes, obviously.
- Merchant cash advances; this is quite a new one, this could help you overcome any seasonality within your business. It’s actually an advance made on your credit card machine so if you’re used to getting quite a lot of payments through your credit card machine this is actually a way of getting an advance on that.
- There are others on there including pension led business finance where you can actually use a SSAS through your pension to actually gain some income that way.
I’m not going to go into the whole lot; there’s loads of them! Essentially if you’re unsure, if you’re looking for finance or thinking an injection of cash would really help your business then please do get in touch and we can talk to you about the different ways and the other different opportunities for gaining some finance.
But I want to move on to the things to consider when you’re looking at a potential company to talk to you about alternative finance.
- You need to make sure that they’re properly regulated in the same way as we’re properly regulated. You can get real peace of mind from using a company that is. You want to make sure that they’re registered with the Financial Conduct Authority. If you go to the Financial Conduct Authority’s website you can see who’s listed and you can check that your potential contact is properly regulated.
- There’s also a best practice body which is the National Association of Commercial Finance Brokers. They have as I say a code of conduct, and they have to abide by that too so that’s another level of reassurance for you.
- Also look and see how long your potential contact has been trading. There are people coming to the market now that are seeing the growth within the alternative finance market and they’re wanting to take advantage. The ideal people to speak to are those that have been in the market for a long time and they know the market and they’re considered and they’re steady, if that makes sense.
- You also want to know how many lenders they have within their panel. Having a lot isn’t necessarily a massive plus but what you want to do is make sure that they can take your situation and look at lots of different opportunities and lots of different potential solutions for you, particularly if you are in a hurry to get hold of some cash. So look for a larger panel than a small one.
- Finally, make sure that you understand how they’re going to make their money. Are they going to charge you a large fee or are they going to get commission from the lender? Just be aware of which way round that is, because if you’ve got to pay them a fee, then you need to factor that into your calculations.
There are some things that you might want to consider before you go to the lending market.
If you have the opportunity to plan in advance for looking for the cash, then it’s always a good thing to do.
- We can help you with business plans, and forecasts etc, but also you want to be thinking about the fact that you’ll need to provide bank statements. Now it’s really useful to have six months’ clear bank statements, and what I mean by that is bank statements that don’t show bounced payments going into the account, or sorry, bounces where you’ve bounced payments, that don’t show you exceeding an overdraft, that show that your business is functioning properly. Essentially you want to show that you’re a good risk.
- You also want to have good credit scores for the directors of the business if at all possible because that does show a really good positive response to the potential lender.
- You need, also, to make sure that you declare everything up front. Don’t hide anything that might be, you might deem to be a negative. Make sure that you’re very up front and that you’re very open and honest. If you haven’t got six months’ clean bank statements if you can do three that’s great. If you can’t do them then just be up front about it and say why. A good broker or a good lender will understand and will take that into account but if they find something after they’ve started the process that you haven’t been up front about then that will look bad for you.
- And finally just make sure that you do consider what you’re doing. Make sure that you do look at lots of different options. The director that I was mentioning earlier on had several different options on the go at once, because one of them seemed slightly less likely. Ultimately it came through and it was the one that we went for, but do try to keep different options open throughout the process.
So that’s a very quick, whistle stop tour of alternative finance. If you’re in any way unsure please do get in touch, that’s what we’re here for! We don’t act as a broker, we will introduce you to people that we know in the marketplace who should be able to help. But you know we’re here as a point of reference and a sounding board if you need it.
So that is ‘alternative finance in a nutshell’! I’ll leave you with that and I’ll see you all very soon.