Obtaining finance for your business is sometimes necessary and makes good sense…not for reasons such as struggling sales or cash flow problems, but for matters such as planned expansion or upgrading of your business.
Lenders are always willing to provide finance, but only if all their risk concerns are satisfied which requires information such as a business plan as well as up-to-date profit and loss accounts. We can assist you in applying for finance by ensuring you have the necessary documentation in the form of a business plan, profit and loss or anything else related to your business accounts that a prospective lender may require.
Unless you have a particular lender or broker you want to apply to for finance, we do have relations with some reputable bodies specialising in various types of finance whom we can forward an application on your behalf.
Which Type of finance?
We are not brokers, but as your accountants and with knowledge of the types of finance listed below, we can suggest which type may work for you based on your business accounts and plans.
Getting your first small business loan is a major milestone. But so is going through the application process! From making the decision to seek financing to putting together a small business loan application.
Before you submerge yourself in the business loan application process, make sure you understand your options. Are you sure you need financing? If so, is a term loan the best option for your industry and stage of growth? Small business financing is available in many forms, from business credit cards and small business loans, to invoice financing or factoring.
Understand the pros and cons of each so you know what to expect and where to find the most appropriate financing for you.
Once you’re ready to dive into the world of small business loans, you’ll need to get a firm grasp of two essentials: your credit and your use case. With that knowledge, you’re ready to prepare a successful application for a small business loan.
Your Business Credit Score
Small business owners are notorious for mixing their personal and business finances, especially at the start of a new venture. The problem with overlapping accounts is that they can cause huge headaches when it’s time to file taxes or apply for a small business loan. Establishing business accounts early also gives you the chance to build a credit history. It also prevents personal issues from affecting your business credit score and vice versa. Separate business and personal accounts as soon as possible to protect yourself and avoid confusion.
As you do business, you are building a business credit report. How does a credit report translate into a score? There are technically different companies that calculate slightly different scores. The Dun & Bradstreet PAYDEX score takes nothing but your payment history into account. Experian and Equifax also consider legal filings, public records, and collection agency data. All three scoring systems come up with three digits, but each employs a different scale. To maintain a healthy business credit score in any system, paying your bills on time is key.
YOUR PERSONAL CREDIT SCORE
Even after you’ve established separate financial accounts for your business, your personal credit score still matters to lenders of small business loans. Imagine hiring a professional driving instructor only to discover he’s accumulated a dozen moving violations in his off time. In the same way, your personal creditworthiness matters in business relationships.
What determines your personal credit score? As with a business credit score, the most important factor is your history of payments. The more often you pay your bills on time, the better your score is.
But paying on time doesn’t guarantee a great score and great terms for your small business loan. Other factors include total debt owed, types of credit you’ve had, the length of your credit history, how much available credit you’ve used (i.e. utilization rate), and how often you’ve applied for credit in the past.
KNOW HOW MUCH YOU NEED AND CAN AFFORD
As a small business owner, you need to figure you exactly how much money you need as well as how much you can afford. Working with an accountant before applying for a small business loan can help you get accurate estimates of both amounts.
Making your request as specific as possible helps you even more as it helps lenders assess your small business loan application. Know exactly what you’re asking for and why.
An excellent way to show you understand your business is to build out a budget for the funds you’d get from a small business loan. Estimate what you want to use them for and how much that will cost. If you need to buy an expensive piece of equipment, cite the market price of that piece and any associated costs. Project how much revenue owning that machine will bring into your business. These numbers don’t need to be precise; just use whatever information you have to back up your request for a small business loan.
It’s easy to justify needing money, but when you know your needs inside out, you’re more likely to receive a small business loan offer for that amount.
YOUR FINANCIAL STATEMENTS
Like credit scores, financial statements say a lot about your business at a glance. Take a look at your financials from the last few years. Ask us to help prepare the following statements in preparation for your small business loan application:
Once you have your financial statements in front of you, you can answer these important questions, which affect your small business loan application:
If the answer to #3 is no, you need to have a plan for how to get there. Where is the operating leverage in your business going to come from? Perhaps it’s opening another store. If you’re a retail brand, perhaps it’s from securing better rates from your suppliers once you start ordering in bigger quantities. Understand how you’re going to improve your profits, and you’ll have a stronger case for getting a small business loan
A bridging loan is a type of short term finance that provides a quick solution when other means of finance cannot be arranged or are unsuitable.
Why a bridging loan?
The need arises when a large sum of money is required within a tight timeframe and the relevant amount of cash is not available. This is best illustrated in purchasing auction properties where deposits must be paid within 28 days of the bid.
Bridging loans typically last for any period up to 24 months, sometimes longer depending on the terms agreed. Charges for a bridging loan vary quite significantly depending on risk factors but on average you could be paying around 1.5% interest per month.
?What do lenders require to give a bridging loan?
Firstly, you will need to show that you have the means to pay back the monies that have been loaned. This could be in the form of an asset that you intend to sell in the near future, be it a development project or existing property.
Lenders will only provide unregulated loans. This means they will not give bridging finance to property owners who want to use their own residential property that they live in as security for a loan.
The minimum amount of loan is £50,000. Some lenders can provide a smaller amount, however, this is rare given that bridging loans are a type of commercial finance.
Purchasing expensive machinery or other equipment that is vital to growing or maintaining your business is a challenging task, especially for SME’s with tight cash flows.
So it is not surprising that using asset finance as a means of obtaining essential equipment instead of purchasing it outright is one of the fastest-growing trends in business finance.
HOW DOES ASSET FINANCE WORK?
Much depends on the value and useful life of the asset, however, the lenders will look at your business model to see how the necessary repayments will be maintained whilst taking into account payment of all other liabilities. We may recommend other means of finance as a solution depending on the nature of your business as well as current and future market trends.
Don’t worry if you have experienced problems with your bank or other high street lenders. We will assess your situation to establish how you can obtain the equipment or machinery that is vital to your business.
If your business lacks three years of annual accounts, we will look at the asset itself as the principal source of repayment.
WHO IS ASSET FINANCE FOR?
Many businesses have to keep investing in equipment and machinery in order to maintain their clients or for reasons relating to regulatory requirements. Small businesses especially have tight budgets so purchasing equipment outright can be challenging to maintain healthy cash flow.
Asset finance can provide a perfect solution for your business needs without causing unnecessary cash flow issues. It can provide an ideal platform for small businesses to grow without compromising the day to day needs of the business.
You may already own all the equipment your business needs, but often businesses experience difficult times and need to raise cash to get through quiet periods. Asset refinancing can release cash for your business by using your equipment as security for an agreed repayment of the monies loaned to your business.
We will assess the value of your machinery or equipment to establish how much your business can borrow as well as the ability for it to manage the repayments should the finance be granted. Our specially trained staff will be able to establish the most appropriate solution that is in the best interest of your business.
WHAT ARE THE DISADVANTAGES OF ASSET FINANCE?
Asset finance agreements are typically structured over a fixed term. In certain instances, it will not be feasible to terminate the contract prematurely as there could be penalties making it an expensive option.
The total cost of repayments that you would pay back on your asset finance will be higher than the cost of buying the asset outright.
Some assets may also require further security and this can be dependent on your company’s financial position. This also may reflect on your company’s credit rating as a negative.
WHAT ARE THE BENEFITS OF ASSET FINANCE?
The asset finance is held to be an operating lease, so this is classed as an expense rather than debt, therefore it will not affect your company’s credit rating negatively.
As the regular lease payments are small this allows for the business to free up essential cash-flow.
As you will be paying a fixed monthly amount over a defined period of time this will enable clearer budget management within your business.