Funding options - a short guide to picking the right one for your business

8 August 2018

As a business owner there is an ever increasing need for new funding options to maintain working capital and fund new innovative products or projects.

With increasing material and outsourcing prices, the need to adapt to customer demand and pressures from environment groups all increase the need for further investment in current production methods, materials and business plans.                                      

A particular hot topic since the airing of Blue Planet has been the need to reduce plastic usage and switch to more sustainable alternatives. This is leading some of our clients to invest in new machinery that is able to package in cardboard as well as plastic, researching biodegradable packaging or just re-thinking the packaging design. Customer demand is increasing, think of the food and drink industry, for example, where customers are requiring companies to produce vegan products which may results in significant investments in new product lines and machinery. At Old Mill we recognise these challenges and have put together a list of your funding options should your business require a cash injection.          

Each option has its benefits and drawbacks so it is important to be clear on how much funding you need, how long you need it, the type of funding partner you require (are you looking for a straight forward loan or are you willing to give up equity) and the level of risk you are willing to accept.           

Bank overdraft

Bank overdrafts are often a good way to fund short term cash requirements due to seasonality or a particularly large order and can be relatively cheap to arrange. It is a method of flexible debt to smooth peaks and troughs in your cash flow. However, interest and bank charges can be expensive and the borrowing is often only for small amounts. For larger or longer term funding another source of financing maybe a better option.        

Asset based lending      

This is lending against your short term assets (although can also be linked to long term) by way of invoice discounting or funding against your stock levels. By selling your debtors to a bank you can usually gain a cash facility up to 90% of the value of your debtors. This can be particularly useful for providing immediate funding to facilitate equipment purchases, expansion plans or restructuring.

Again this debt can be flexible with the company only drawing down what is required and the facility is likely to grow as your company grows. This form of funding can be useful when input prices are rising as debtors balances will also be rising. However, in many cases the bank will take control of recovering your debts which can upset debtors. They are usually much more forceful and less understanding than you would be as a business owner (a long lasting relationship is not important to them). There are ways to keep debt recovery in house but this can lead to increased paperwork and audits from the bank.                                       

Leasing                              

This is by far the most popular type of finance we see with many of our clients. It is the process of paying for an asset over the life of its use. Depending on the type of lease, the ownership of the machinery will then either transfer to the lessee or stay with the lessor. It allows businesses to acquire equipment without having to provide a 100% capital outlay. Paying for a piece of equipment this way also improves cash flow forecasting and the interest on payments are tax deductible. The downside to this type of funding is that you do not get 100% tax allowances (Annual Investment Allowance) up front so the tax benefits are spread over the life of the asset and the overall cost of a purchase is higher due to interest charges. These interest charges can also be difficult to account for so it is worth getting your accountants advice on this. A particular area of interest of our clients regarding leasing is the tax treatment of new cars. There are less reliefs available per year for cars with high emissions (110gm/km) so, again, check with your accountant before investing in these.      

Bank loan                         

If you are looking for a longer term loan then a bank loan could be the obvious choice for you. However, banks will often require some security on the loan by way of an expensive piece of machinery, a building or a charge over all of your assets. Longer term loans will often carry lower interest rates than utilising an overdraft facility and are more secured (the bank cannot suddenly withdraw your facility). However, upon default a bank will often be able to recover all of the amounts owed to them before shareholders and the bank can impose very stringent restrictions on the firm’s ability to obtain future funding. The bank may seek to do this in order to limit their risk, further financing can lead to a higher risk of default on the bank loan. Finally, bank loans can be costly to negotiate, especially if limited security is given, although a good business plan can help to overcome this. If this is something you are considering, it may be worth having an accountant look over your forecasts to ensure that everything is included and they are achievable.      

Private investor              

Not all funding is achieved by raising debt. In many cases a private investor may take an interest in buying equity in the company for a significant amount of money. The benefit to the firm of selling equity is a large cash injection and often an introduction of a new board member, bringing with them knowledge and contacts in the industry. If significant growth is achieved a business owner may have fewer shares but the company’s value increases, resulting in a more valuable holding.

There are however, many downsides to this type of investment. Many of the businesses we deal with are passionate about their product or service and have dedicated their life to watching it grow. Giving away part of the ownership in your company can be difficult, especially as decisions are then shared. Your vision for where the business is going may not be shared by all parties resulting in significant changes which you may not like. Additionally, investors often want quick returns on investment at any cost, which may not be your sole objective. Finally, the investment process can be cumbersome. Due diligence procedures will need to be followed which we would highly recommend you involve your accountant in so it is likely that costs will escalate.     

Whether it’s the tax implications or a management buyout you are trying to structure, we have specialists on hand to help you on your way. If you would like to know more about how we can help, contact Wayne Bastian on 01935 426181 or email wayne{dot}bastian{at}oldmillgroup{dot}co{dot}uk 

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