Winning finance in a recession
‘May you live in interesting times’ is an old cliché, and it applies as much to small business as it does to life. For the world of financial services, these can only be described as such.
By John Benner, director at commercial finance group IGF
The narrowly-averted collapse of the global financial system, banks refusing to lend to each other, mortgages being pulled from the market and even basic credit card applications being subjected to detailed scrutiny – it’s a tough market out there for consumers and businesses alike.
On a micro-scale, the ongoing credit crunch is making it much harder for many businesses in the UK to raise finance. This is a real issue for start-ups and small business owners.
Focus is the key; in such a confused and volatile market, entrepreneurs need to know exactly what’s on offer and at what rate. This is probably the only instance in business where entrepreneurs need to think small – small providers that is.
With the big banks tightening their lending criteria, now is the time that smaller, nimbler, more flexible providers can show their worth.
Be honest
The first thing to remember when selecting a provider for finance is to be honest and realistic. The biggest mistake you could make is to avoid talking about your history. If you’ve got a history, explain it.
People often learn a lot more from managing a failed business than a successful one, so don’t assume that discussing a failure in your past will put you on the back foot.
If you don’t offer this information and the finance company finds it out, you will have destroyed trust in the relationship before it’s even up and running.
Knowing and understanding your finances is fundamental when it comes to getting funding. Demonstrating in-depth understanding of your profit and loss account and being able to forecast your financials increases your chances of winning finance.
Again, being upfront, pointing out potential difficult periods and identifying potential problems will work in your favour. However, don’t let the economic conditions overshadow your enthusiasm. Self-belief is contagious; if you believe in yourself and your business, others are far more likely to as well.
Research the market
From a practical point of view, in the current climate, finance is more expensive - so ensure that you do your research and have realistic expectations of what your borrowings will cost (and how those costs will fluctuate).
Avoid expensive short-term funding solutions, such as credit cards, and make sure that you keep your cost base to a minimum. Also, consider protecting your business against bad debts.
For start-ups, a bad debt could seriously jeopardise your survival. There is nothing more frustrating than running into difficulties with cash-flow through no fault of your own and there are more and more cases of large companies improving their cash-flow by delaying payments to suppliers.
You could also think about credit checking the companies you choose to do business with – both client and supplier side.
Think laterally
Creative thinking is also key. In order to optimise your business finances you need to think about the potential sources of finances open to you as a small business owner.
Most owner-managers of small companies use overdrafts, bank loans or equity funding to finance their growth. However, these traditional options are becoming more expensive and, in some cases, may no longer be available.
Options such as asset-based lending (ABL) and invoice finance are viable alternatives to asking the bank for a secured loan. ABL enables you to fund the high debtor levels associated with expansion by unlocking the potential of the assets on your balance sheet.
Any asset may be considered – be it machinery, equipment, buildings, or a whole host of other options. Borrowing money against a sales ledger is an ideal option for start-up smaller businesses.
In practice, it means cashflow situations improve with every new customer signed. For an agreed administration charge, a factoring company will take control of an SME’s sales ledger and will pay it up to 85 per cent of each invoice value immediately.
When the customer’s credit period is up – generally between 30 and 60 days later – the factor will begin its collection procedures, with some companies providing a tailored collection service to fit around the way you would like the credit control handled.
