Finance today, and particularly in an uncertain economy, is all about what the funding can be secured against. If there is something to secure it against, in many cases funding can happen.
Why? It's because if the payments are not kept up, there is something in return that the lender can have. Typically the security is relevant to the business capital requirement.
So what can funding be secured against? The obvious, and most cost effective asset, is commercial property, but many businesses do not own such an asset, nor can they afford to. However, other alternatives exist depending on the industry sector:
Funding can be secured against sitting stock, or stock that has been ordered and not yet paid for.
Any business that is involved in stock can apply for stock finance, also known as inventory finance, import finance or trade finance. Examples of businesses that can qualify include retailers, wholesalers, importers, distributors and manufacturers. Facilities tend to be based on short-term transactions over 90-120 days. The beauty is if you don't use the facility you don't get charged interest, so there is excellent flexibility. Facilities are also typically on a revolving credit basis, which means you can use it again and again. Interest rates can seem high at around 3% per month, but if your margins are large enough (typically 20% plus considered), the net benefit to the business of using this finance far outweighs the cost.
Funding can be secured against orders or invoices raised
This helps businesses with cash-flow gaps between getting an order and receiving the sales revenue from the customer. Invoice terms can be anything from 30 days upwards, and the bigger the client, usually the longer they take to pay! Products vary in terms of rate, but usually anywhere between 65 and 85% of the invoice amount is paid by the finance house to the borrower, whilst they chase the buyer for the outstanding amount. The credit score of the buyer (known as the end debtor) is a significant factor in lending. Most sectors qualify for this sort of finance, with Business to Business (B2B) firms, who typically receive invoices, the most likely to qualify.
Funding secured against existing equipment/machinery
Plant, machinery, vehicles or other equipment the business owns, can be funded using asset finance products. Typically, finance will be provided on items that have been bought in the last 2 years, with the accompanying paperwork confirming purchase to the company available. Rates and terms again vary between asset classes and sectors. However, this is another method with which one can inject capital into a business.
So this finishes the Business Banking Series. I hope the information and insights into the business finance arena can be of value to your business.
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16 Facts At a click and a glance
1 - Why going into the High Street branch is not the best way to source a commercial mortgage, business loan, or business banking manager
2 - Brand loyalty does not pay. I'll explain why your current bank is not incentivised to offer a better deal
3 - Bank managers that understand your business do still exist, but they are not where you used to find them. Find out where they are, and how to access them
4 - The good news about Business Bank Credit policies: the criteria for assessing businesses is changing regularly, and in the main terms are improving
5 - Why your perfect borrowing history is of little relevance, and why its not personal
6 - You can profit from moving bank, right now, by accessing a much misunderstood fund, as well as improved terms
7 - Different banks like different sectors: what's happened
8 - State-owned banks: an update on where they are
9 - Privately owned banks: an update on where they are
10 - Interest only commercial mortgages: today's marketplace
11 - How a change of mindset can be of great help
12 - Why banks want to know your inside leg measurement, and why it’s not personal
13 - How to work out if a bank will lend to you, right now
14 - Debt service cover: what it means, why its important and the good news coming your way
15 - Why you may need to bank with more than one from now on
16 - If your business does not own property, nor wish to buy one, there are other, new, niche financiers available that can help with your requirements.
About Chris Davidson
Chris Davidson is Managing Director of Discover & Invest Ltd.
He believes passionately in providing businesses with market-leading financial insights that have a positive impact on the bottom line. As a result, Chris helps get the best rates and terms available at any one time.