Would You Like to Invest in Some Plant for your Business?

Would You Like to Invest in Some Plant for your Business?

Looking to invest in a new piece of plant for your business? Robert Keep, from Norton Folgate looks at various sources of alternative finance and comments on how best to approach what many consider a confusing issue.

High Street banks have traditionally been the first point of contact for many SMEs and plant owner/operators wanting to access funds, but recent economic events have resulted in reduced lending from the ‘traditional’ sector, which has meant some find it hard or even impossible to access capital.

Mainstream lenders tend to offer ‘packaged’ products and don’t always cater for how businesses operate today, so are not always the best places to access funds,” explains Robert.

“When it comes to providing mortgages or straightforward cash finance like a loan or overdraft they invariably apply their ‘tried and tested’ lending formula, but this is not always the most flexible or cost effective way to access funds.

It’s really quite surprising how many businesses continue to use what are in effect ‘on demand’ forms of finance that are designed to assist cash flow and growth to purchase fixed assets.

Of course clearing banks invariably house asset finance and leasing businesses but if you are a bank borrower in any other product class, this can adversely impact your asset finance or leasing application.”

Over the past few years, the lending process has become increasingly formulaic, closing the door on some if the required loan criteria are not completely met.

This has resulted in the growth of ‘alternative’ organisations developing innovative and flexible financing packages but as you’d expect, as legitimate opportunities have grown, some less desirable options have appeared on the market.

SONY DSCMinimising risk is important so with whatever alternative funding schemes you consider you should stay alert for things like the warning signs of investment fraud and costly short-term, restrictive loans.

For many businesses that have a constant level of sales but are suffering from cash flow issues, invoice financing has proved a viable alternative. Funds can be secured against an outstanding invoice to meet short term requirements – for a small percentage of the overall amount. This can be a viable solution for short term cash flow.

Peer-to-peer along with pool /crowd funding from individuals, businesses and institutional investors have increased in popularity and have been widely publicised over recent months.

The application process is similar to that of a normal bank as credit checks are carried out and often results in a quick decision and a positive provision for many.

Providers also tend to be willing to negotiate both the amount being borrowed and repayments, however, rates vary considerably, sitting around the seven to 10 percent mark and an arrangement fee of up to 5% can be incurred.

The knowledge required to secure money via this route can also be disproportionate and while some big loans have been achieved, small amounts are more common.

The method is also heavily skewed in favour of businesses that have a tech/internet savvy FD type on hand, many owner managed business simply do not have this. Additionally, loans are often secured by debenture which is difficult or impossible if the more widely used invoice finance is already in play.

Crowd funding can be likened to a Dragons’ Den style of lending, with businesses ‘pitching’ typically online to try and gain investment from interested parties. The drawback here, particularly for the purchase of capital plant, is that you’ve got to seduce the investor with a proposition that ‘appeals to them and delivers solid financial returns.

Business angels (and we’d include family loans in this category) are also out there, looking for opportunities to invest. But here the trick is identifying them, so it’s a far less obvious source of funding although it may work for some, particularly if it’s for an interesting capital based project. Funding from family members may also not be an option.

dsc_0134Then there is asset based finance, probably the fastest growing sector. In 2015 over £27 billion of funds were provided to over 44,000 UK businesses, significantly exceeding the amount lent to SMEs through overdraft. Simply put, affordable funding will normally be provided against a pool of assets held by your business.

These may include existing plant and machinery or the new piece being purchased, stock or inventory, work in progress, property, even intangible assets such as intellectual property.

A combination of all these can be used as the borrowing base against which the desired funds can be provided, making it one of the most flexible sources of funding available.

Also as turnover and your asset base grows, the availability of additional funding typically follows so once a relationship is established it should be relatively simple to extend the borrowing, helping you grow the business further.

A couple of final thoughts, regardless of the route you take.

Apply for funding before you think you need it; be prepared to sign a personal guarantee if you run a small business; be honest with yourself and the lender; and put together a strong business plan, backed up by trading statistics, which clearly explains how the purchase will improve the business, increase profitability and provide a viable mechanism to safely repay the loan.

Money has never been cheaper and acquiring a new machine could help jumpstart your business. As a general rule of thumb think dedicated funding for fixed assets and on demand funding or invoice finance for current assets ONLY.

Norton Folgate is a leasing and financing specialist that provides an effective alternative to more traditional sources of funding for businesses.

For more information click here.

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