For many of us, taking out a loan is a big deal. It’s easy to view business finance negatively, a sign of failure: I haven’t earned enough money, so I must borrow it instead.
But for a business with growth potential, this type of mindset is a hindrance.
A better way to think of business finance is as an investment in your company. Strictly speaking, investments involve sharing profits and control when, typically, a loan doesn’t. But the shift in mindset from ‘taking on debt’ to ‘winning investment’ is helpful for many small business owners.
Because it’s important to realise that if they do decide to lend to your business, lenders really do believe that you will succeed and be able to pay them back. This should be a big confidence boost.
After switching to seeing business finance as a positive thing for your business, the next step is to recognise when you might need it.
Here are some of the most common scenarios we encounter.
“I have no buffer for a bad sales month.”
Even if you are profitable across the entire financial year, there may be months when your bank balance reaches zero or even turns negative. This can suddenly leave business owners without funds to pay salaries, rent, and invoices.
The fastest way to react is with a short-term loan that can be repaid early. But if this is a scenario that occurs repeatedly, a more cost-effective and less stressful solution would be to prepare for it. We might recommend an overdraft facility or revolving credit line. These products are flexible in that they are always available, but you only start accumulating interest from the time you tap into them until it is repaid.
“I have no cashflow because my biggest clients take three months to pay their invoices.”
It’s very common to see small businesses struggling with cash flow due to late payments and long payment terms of 60, 90, or even 120 days. This is incredibly frustrating when you know you have a flourishing, profitable business.
Cashflow issues arising from long payment terms are so pervasive in the world of small business that there are now dozens of finance products designed specifically to help.
This invoice financing works by a lender advancing you a portion of an invoice, anything from 70% to 90% of the total value. When your customer eventually pays the invoice, you receive the remaining balance, minus the lender’s fees and interest (typically 1–3.5% per 30 days).
“I need to buy more stock to stay ahead of demand.”
When business is booming, sometimes the limiting factor is how much stock you can afford to buy. In addition, since the pandemic exposed the vulnerability of global supply chains, some businesses now want to carry enough components or stock to see them through any short-term disruption in supply. Both scenarios can require funding.
Because they are designed specifically for these situations, we often recommend inventory loans, where the inventory purchased serves as collateral. Another option is a revolving credit line, where a business can dip into an agreed amount of funding and repay over a set period.
The advantage of these two solutions is that a business only pays interest on exactly the amount needed and only from the point those funds are paid out. But they do not allow for early repayments. If a business wants to be able to pay back the funding as soon as possible, a fixed-term loan with flexible repayment terms may be preferred.
“My monthly loan repayments are too high.”
Sometimes businesses start with loans that have high interest rates. Perhaps their financial situation at the time limited what funding was available to them, or maybe they didn’t shop around and simply took a loan from their usual high street bank.
Either way, if you’re struggling with monthly repayments or just have a feeling that they are unfairly high, it’s worth a discussion with an unbiased broker like Risecap to find out whether the debt can be restructured and refinanced. Even if the existing loans have early repayment charges, we can calculate whether or not you would save in the longer term if you paid them off using a new loan with better terms.
During refinancing, it’s not unusual for businesses to find they can get a larger loan while still making lower monthly repayments. They can then benefit from a cash injection from the new loan and the lower monthly repayments.
“We have the chance to buy another company.”
When an acquisition opportunity arises, financing can help cover the cost of making the purchase and blending the two companies together. If the current business is strong enough, it’s possible to raise the money based on the existing financial performance. Lenders will typically fund up to two-and-a-half times the EBITDA.
Asset-based finance is another product that can secure the funds needed to buy another business. It uses assets within the target company as collateral, typically invoices plus stock or hard assets like machinery.
“I think we need financing but don’t know what my options are.”
In this scenario, it’s vital to work with an unbiased brokerage that puts clients before commission. You don’t want to be pressured into taking out a funding product you don’t need or which isn’t right for you. A good brokerage will also help you get your financial information organised and presented in formats that make your strengths clear to lenders.
Always ask your broker how many products and lenders they’ve reviewed for you, what their commission is for each of the options they’ve presented to you, and whether you could get a better rate if you provide additional financial information and details.
0203 089 7919
hello@risecap.co.uk
3rd Floor, 86-90 Paul Street, London EC2A 4NE
0203 089 7919
hello@risecap.co.uk
3rd Floor,
86-90 Paul Street,
London EC2A 4NE
Risecap Ltd Data Protection Number ZA553906. The registered address is 85 Great Portland Street, London, England, W1W 7LT. Risecap is a credit broker and not a lender.
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