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Kirk Rice Blog

Raising Business FinanceWritten on October 11, 2018 by Kirk Rice LLP

Raising Business Finance

Sooner or later, every business will face a requirement to obtain finance for their business – and even if one dislikes debt, it can often be highly beneficial to grow your business using third party funding, if managed in the right way. Read on to find out more about your options for raising business finance.

Most people, when considering raising business finance, will automatically go to their normal bank. However, the requirement for cash can arise for many reasons, and it is very important to consider those reasons first as they may ultimately dictate which method of financing is best for your business.

For example:

  • Is the financing requirement long or short term? Is it to fund a cash flow shortage for a known period, or a specific long term asset or project?
  • How risky is the requirement? Is it normal business, a risky experiment, or an asset that offer some sort of security?
  • What relationship are you looking for with your funder? Purely that of a third party lender, or long-term business involvement?
  • What will the funding cost? Short-term or secured lending will often be cheaper than long-term or unsecured; equity funding will make costing far more difficult.

Before considering your options for raising business finance, you should always speak to us at Kirk Rice LLP to ensure you are looking to secure the right amount of funding, and choosing the most appropriate source.

Bank loans/overdraft

As previously mentioned, this is usually most people’s first instinct, and often for good reason – the bank may already have good knowledge of your business and make the whole process relatively pain-free. Nevertheless, banks will usually require some form of security, and will charge interest on lending (NB remember interest on a business loan is tax deductible, so the effective rate is cheaper than the headline rate). On secured debts, banks will usually take a first-charge over the company’s assets, which means they rank higher than other creditors should the company fail or be liquidated. Some banks make lending decisions via centralised committees, some make decisions in-branch.

At Kirk Rice LLP, we can help you get the best results out of your bank, or indeed other banks who may offer better terms. With some preparation, banks are more likely to lend to businesses that have well-prepared business plans, or that have geared their company finances to be more attractive to lenders. As well as having our own contacts within many banks, we can use our expertise to ensure you are viewed as a sophisticated lending proposition, hopefully with a view to getting the decision you need.

Government-backed funding or Regional Loan schemes

These lenders, usually backed by local government, and sometimes angel investors, are another very useful source of funding. Lending in a similar way to banks, these entities are set up with the sole raison-d’etre of making loans to businesses to boost the economy. The same advantages and risks apply as for banks, but decisions are usually made by a more local committee who will have a contact assigned to help manage your application.

At Kirk Rice LLP, we have many contacts at such entities and as such can direct you to the right person who will hopefully help your funding proceed. We can help tailor applications and liaise directly with the lender regarding your accounts and other relevant information.

Asset-based lending

If you are looking to finance a specific piece of machinery, or even general cashflow, there are plenty of lenders who will lend using a specific asset as the security for the loan. Rates of interest will depend upon the quality of the security, and again, the confidence that the lender can perceive from your business’s finances and accounting.

At Kirk Rice LLP, we can introduce you to a variety of such asset-based lenders. We can also ensure that you enter discussions with them with robust financial information, and knowing what the real cost of the finance will ultimately be.

Leasing

Of course, if you are looking to acquire an asset, do you need to actually own it outright….? Through an operating lease (hire), legal title will remain with the lessor; alternatively, through a finance lease (hire purchase) you will ultimately obtain legal title.

Spreading the cost of as asset purchase using one of these methods can be very beneficial for cashflow, but different types of lease have different tax treatments, so it is important to take professional advice regarding the actual cost of using these options.

At Kirk Rice LLP, we can advise on the best way to finance purchases. Dealers or sellers of the types of assets acquired under these types of leases will often make apparently attractive offers or offer incentives to use their preferred option, but obviously this may not be the most efficient way of financing. We can analyse the options for you and ensure you have the facts to make the correct decision for your circumstances.

Factoring or invoice discounting

Using a factor or invoice discounter can be highly beneficial for cashflow for businesses whose customers take a while to pay them. The provider effectively provides an advance on your sales invoices for you, either by taking over title for the proceeds, or by a simple advance, depending on the agreement in place. Most banks offer this service, but there are also specialised providers. They may also take on the collection of the sales proceeds on your behalf. The accounting for this can get complex, and if there are many sales invoices involved, it can be tricky to ensure it is all administered perfectly.

At Kirk Rice LLP, we have experience of all forms of this facility and can assist with the accounting for the transactions and facility. We also have many different contacts at providers, and can make relevant introductions so that you may have a choice.

High net worth individuals

If you know a well-off individual who is willing to lend you the funds personally, then this may well be a very easy option to use. Family and friends can help here, although its always best to formalise arrangements with agreed terms, to protect both sides and ensure tax compliance. We also have many contacts, from within our own client base and beyond who we can introduce you to, some of whom are always looking for exciting opportunities.

It is worth noting here that there are some attractive tax incentives for individuals to invest in businesses (via equity) through SEIS and EIS schemes. We have in-house expertise to ensure the best results are achieved for investors and the recipient business.

Private Equity and Venture Capital

This is where investors provide funds in return for shares in the business, and usually some sort of involvement in the running of the business. Equity investors can often be found amongst your employees, industry contacts, and friends – those who you can trust enough to go into business with. However, our larger clients looking at this option will also need to consider specialist PE/VC firms, most of whom will be looking for scalable companies with a track record, and having a common goal of growth and exit within a certain timeframe. This is often a very successful route if you have a successful and proven business that needs to ‘level up’ in terms of capital investment. These investors will usually have high level industry contacts and exemplary commercial and strategic expertise and will have a vested interest in maximising your business’s potential, as they will only realise a return when selling their stake in the business.

We have many contacts at PE/VC firms and can make qualified introductions. Different firms specialise in different sectors, and also tend to have preferences for businesses at different stages of the life cycle.  Again, we can assist in ensuring that you proceed into negotiations in the best way and without any surprises.

The above summary is just that – a summary, and there can be many other considerations to take into account. The best solutions for raising business finance can be different for different businesses, and you should always speak to the partner dealing with your affairs at Kirk Rice LLP  when considering your financing options.

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Any reader interested in discussing raising business finance, can telephone Tim Neale on 01344 875000 in our Ascot office or James Moody on 020 8789 8588 in our Putney office. You can also email info@kirkrice.co.uk.

Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.

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