Regardless of how impressive your products might be, or how dazzling their market potential, if you don’t have long-term finance in place to fund expansion, it is unlikely you will be operating anything more than a small company five years down the line.
The problem, of course, is that unlike short-term finance, which is generally easier to achieve, long-term facilities – in the shape of loans, asset finance packages and commercial mortgages – are a difficult part of the financial jigsaw to slot into place. Many growing businesses fold because they fail to source such long-term finance. An even greater number hit the financial rocks because management realise (too late) that their business is not adequately primed to repay the long-term strategic debt that was put into place.
Plan ahead to secure the funds
Of course, some lucky businesses are able to forego debt-related growth by funding their expansion through cashflow. However, while admirable, this can often be a very slow way to progress, because without the punching power of substantial resources to draw upon as and when you need them, business opportunities that require fast movement – from acquisitions to new product launches – often slip through the net.
According to Nigel Lander, a specialist finance adviser at Business Link, ‘when it comes to long-term finance, growing businesses tend to be reactive, which is a big fault. At every stage, all owners need to ask themselves where they want their business to go and what they will need to get to that stage. You need to get a feel for whether you will be embarking on organic expansion, acquisition-led growth or other options.’
He adds that you must evaluate your business plan and gauge the right business structure and the appropriate level of finance to execute it. ‘Attaining long-term finance is all about forward planning and anticipation. The whole process needs to be run like a rolling campaign.’
Never take on too much debt
Before you embark on debt-fuelled growth there are two golden rules. The first is that you must never overburden the balance sheet with too much debt that a rise in interest rates or a business slump will affect too greatly. This is a routine mistake made by many a gung-ho executive, especially in publishing, recruitment and other sectors that are cyclical in nature.
The other rule is not to use any bank facilities to expand and then proceed to ‘over-trade’. Industry is littered with examples of ambitious ventures that have taken on orders they couldn’t fulfil and suffered greatly as a consequence.
Business loans – your flexible friend?
The most conventional long-term finance package is a business loan. These are often flexible in nature and can be tailored to meet your growth needs. Amounts on offer range from £500,000 to £10 million and beyond.
Fraser MacKay of Barclays’ Business Banking service says ‘loans are very flexible tools. They can be utilised for a wide range of projects, be it expansion, product development, purchase of assets and even for working capital if you are moving to new premises.’
Stephen Pegge, of LloydsTSB Business concurs, adding that ‘one of the attractions of a business loan is that, as opposed to say, attracting equity investment, you are not selling a part of your business to grow. You retain 100 per cent and don’t have to worry about outside partners or dividends.’
There is generally no limit on what you can borrow and the choice of what’s on offer – in terms of amounts, interest rates, charges, repayment packages, insurance and payment holidays – varies greatly. A great place to gauge the types of loans and packages available is www.easy-quote.co.uk, a website that allows you to search for competitive quotes from all the UK’s major banks.
Be prepared for rigorous scrutiny
Before a bank will lend though it will conduct a thorough review of your operation. David Kovacs, a corporate manager with Svenska Handelsbanken Manchester, is typical of most bankers in conducting a financial appraisal that encompasses ‘a multitude of issues, including repayability, security, profitability/liquidity, balance sheet stability and owners’ equity.’
Stephen Pegge says that, like most banks, LloydsTSB ‘will evaluate the business plan, cashflow, and balance sheet and tailor a loan to a business. We will also seek a debenture over assets and/or property for security.’ He continues, ‘when either Lloyds Business or Lloyds Corporate lends money, we take a completely holistic view of the business and its needs. We are cashflow lenders, so companies need to demonstrate that the business is sufficient to meet the capital repayments.’
Free up your cash
An alternative, and increasingly popular long-term financial alternative to bank loans, is asset finance. This is basically where a business, in need of substantial sums to buy capital equipment or plant, borrows the money from the bank. The amount borrowed is secured on the asset in question and the loan is funded from cash generated by the equipment.
The sums on offer are limitless and most banks will lend anything from £25,000 upwards. There is often a deposit to be paid (anything from one per cent to 30 per cent) although the actual amount is open to negotiation. Repayment periods are usually between three and seven years, depending on the life of the equipment. Various insurance plans are an integral part of any package.
John Burke, senior business manager at Allied Irish Bank, believes many businesses opt for asset-based lending ‘because it frees up important cash. Unlike a loan, which must be fed by structured capital repayments, asset finance loans are usually funded from the actual cash generated by whatever has been purchased, be it printing equipment or a new fleet of buses. There is an in-built flexibility to the product and it is “self-secured”. Banks own it until it is paid for or sold. Wider securities and debentures are usually unnecessary.’
Asset finance loans offer a degree of flexibility as to when repayments start and when they fall due – most banks offer a variation of seasonal, quarterly, balloon or accelerated payment methods.
The process generally falls into two categories:
- Hire purchase – you take ownership of the equipment at the end of the period.
- Leasing – you rent the asset from the bank for an agreed period and return it, or benefit from a percentage of its sale when the lease is up. Various leasing deals are very tax-efficient as you pay and reclaim VAT on the rental price rather than the cash price.
As with loans, banks are interested in only one thing – getting their money back. Everything from sales and profits to balance sheet and trading history will be given a terrific probing. You also require a robust business plan to justify the purchase.
Sell your debts
Another form of asset lending is when you borrow against plant, machinery, stock and book debts you already possess. Invoice discounting is by far the largest component of this type of product. This is selling your debtor book to a bank, which then releases up to 85 per cent of the unpaid debts. The balance, less a bank fee, is released when the debt is settled.
Invoice discounting is suited to larger growing companies and the facility that you can ‘borrow’ ranges from £1 million to £10 million. Prior to opening an account, banks will conduct a considerable due diligence process, inspecting your internal financial system, cash controls and the quality of your customer base. The only sectors that banks may not lend against are software and construction.
Lloyds TSB Commercial Finance regional director James Cullen comments, ‘If you are a growing profitable company selling services to others on credit and billing in arrears, it’s an ideal product. The appeal of it is that it releases working capital into the business faster, giving you the ability to grasp opportunities quicker.’
According to Cullen, invoice discounting may be more accommodating than loan finance. ‘It is long-term in the sense that it is a rolling facility. The amount you can draw down grows as your business grows. Our largest client now has sales of £60 million plus.
Structured and integrated finance
If you need help financing an acquisition or a management buy-out, then using structured or integrated finance, where funds are raised through a combination of methods, is one option.
For example, the Bank of Scotland offers an integrated finance package where the emphasis is on long-term running yield. It offers debt packages of between £10 million and £50 million, using a mix of senior debt, mezzanine debt, loan stock and equity. These funding packages are suited to cash generative businesses, ideally with a low capital spend.
Commercial mortgages can be cheaper than loans
Commercial Mortgages are a cost-effective way of buying new premises for your business or developing the premises you currently occupy to suit your business’ growth.
Like other long-term facilities, the loan is bespoke, closely tailored to the type and size of your company. Most commercial mortgage packages from the clearing banks are purely for owner-occupiers (if you wish to buy to let, other packages are on offer).
The actual amount you can borrow varies greatly, but as long as you can come up with the usual deposit (around 25 per cent of the loan size, or equivalent assets/property as security), and can easily cover the capital repayments, there isn’t really a maximum limit set by lenders.
Take advantage of repayment holidays
You can choose fixed rate or variable rate loans, benefit from flexible repayment patterns to suit the vagaries of your business patterns and even take advantage of capital repayment holidays. The maximum repayment period is usually around 20 years.
Jonathan Moore, of Mortgages for Business suggests that commercial mortgages can ‘deliver maximum financial leverage. The interest rates on offer make them cheaper than loans while the repayment flexibility strengthens and simplifies cashflow management, releasing cash for other more pressing business areas. It’s also worth remembering that certain products come with no redemption charges on early repayment. And of course, you retain ownership of an asset when all is wrapped up.’
Moore argues that if you take a mortgage through an independent finance house, you can ‘lessen your dependence on any one bank.’
Need to know – Business loan basics
- Key benefits: fixed or variable interest rate available. Flexible repayment patterns and capital repayment holidays available
- Eligibility: any business that meets policy requirements
- Security: secured or unsecured. Life insurance cover for the principals is normally required
- Min/max amount: £10,000 minimum. No maximum
- Min/max period. one to 15 years. Ten years for fixed rate
- Charges and fees: Variable rate interest is calculated over bank base rate and agreed at outset. Interest varies in line with base rate. Repayments reviewed annually. Fixed interest rate available, arrangement fee of 1.5 per cent applies. If the loan repaid early, repayment fee is due
- Source: HSBC
Case Study – Using asset finance to maintain cashflow
Huddersfield-based FMG is using an array of asset finance tools to radically expand its business.
Following a period of sustained growth, the group is now the UK’s largest independent provider of outsourced fleet management services, operating an accident management company called AMC, a commercial vehicle breakdown solutions division called Delta, and rental business Satellite.
FMG invested £1.5 million to build new premises with the help of LloydsTSB Commercial Finance and, with the bank’s continued support on working capital, finance director Tim Pickup believes FMG could increase turnover this year to £30 million.
The AMC division is apparently on track to double its size before the end of the year while the Delta Rescue arm is expanding rapidly through both organic and acquisitive growth. Pickup remarks that from a standing start ten years ago, Delta is now the largest independent rescue and recovery service in the UK with annual sales of £5 million.
‘Asset finance has provided the working capital to help us maintain a strong cashflow and finance our expansion’ says Pickup.
Other long-term finance alternatives – Government-backed options
There are a few useful Government-backed schemes for businesses in need of a loan that they may not usually qualify for.
The most widely trailed scheme is the UK is the Small Firms Loan Guarantee Scheme. Generally the loans issued under this are of the sub-£100,000 category.
However, as Stephen Pegge of Lloyds points out, if you’ve been trading for two years or more without a break, you can borrow up to £250,000 and have up to ten years to repay. The beauty of the scheme is that if you get it, the UK Government guarantee covers 75 per cent of the loan. To qualify you must not have more than £5 million annual turnover (manufacturing) or £3 million (service). More information is available at www.sbs.gov.uk/SFLGS.
A surprisingly good Euro idea
For larger, more established and generally more ambitious ventures, HSBC promotes a European Investment Bank Loan Support Scheme.
According to HSBC, the scheme offers lower cost finance to business customers that require money to support capital projects and fixed asset investment. The general features of the loan are:
- available for all loans of £30,000 and above to a maximum of £7.5 million
- minimum term of three years
- for projects costing £60,000 and over
- up to 50 per cent of the project costs can be eligible
- reduced first year finance costs
- no additional administration
To qualify, your business should have less than 500 employees and less than £50 million net fixed assets. EIB provides the loan because its remit is to provide funds to support the development of projects that enrich infrastructure, trade, tourism and the environment within EU national borders.