iQep: Insurance & Finance

Most business owners who are considering taking out a loan think first of all of making approaches to banks, building societies or other established financial institutions.  Whilst this is only natural, there are a number of other sources of advice and help and a number of different approaches to finding finance.  There is government funding, for example, which is offered to companies fulfilling certain criteria and can be a combination of grants and loans.  Funds are offered for a whole range of purposes, including renovations, new equipment, marketing, training or staff recruitment.

In fact, the UK government and European Union have created a funding programme valued at £2 billion in order to offer finance to new and established small businesses.  Amongst the business loans available are low-interest or no-interest loans and government guaranteed loans.

Low-interest or No-interest Loans

There are two national and eight regional loan schemes in this category.  As the scheme title suggests, these loans can be very good value and offer highly competitive rates.  Frequently, they are offered unsecured, so a guarantee or other collateral is not needed.  There are specific loans for young entrepreneurs and for women and they are directed at a variety of different industries and a number of geographical areas.  The range of finance available is from £1,500 to £10 million.

Government Guaranteed Loans

There are six national and eight regional loan schemes in this category, in the range £5,000 to £250,000.  The Enterprise Finance Guarantee Scheme helps small businesses to access business loans from private lenders by providing a government guarantee, which reduces the risk associated with lending money to small businesses.  This is particularly appropriate for companies that want to expand by moving into export markets.  One advantage of the scheme is that there are virtually no premiums to pay for the ‘insurance’ provided by the government and no additional security is required.

When a business needs to increase immediate cash flow, it has several options. There are standard loans, but these often don’t cover expenses on a regular basis. The other option is business finance loans, also known as invoicing financing. This leaves you with two options, including invoice discounting and factoring. Both provide a way to use money from unpaid invoices to grow the business now instead of later.

It is important for businesses to look at their current financial situation before choosing a business finance solution – these solutions are not just for the short term. They also help create better financial management and credit protection in the long term.

Choosing The Right Business Finance Solution

Invoice factoring is the more cost effective of the two available types. Factoring allows a third party to handle your invoices and debt collecting for you. It is also available for smaller businesses as well as medium sized and large companies. With an option to remove liability for unpaid debts, factoring is a perfect all round solution. Businesses should consider the fees involved. You will not receive the full invoice amounts. The factor keeps a set percentage, which varies greatly with factoring companies, but is usually at least 5%.

Invoice discounting works similar to factoring except you maintain your sales ledger and handle debt collection. You borrow against a set percentage of your invoices. The discounter keeps a set percentage of this amount. You also pay an interest fee until the borrowed amount is paid in full.

Loans are a fact of life for most business owners. Capital is needed to make investments and improve the earning power of a company so a means of getting hold of greater capital before investments have paid off is essential. Banks provide much of the financing for business and the first financial move of many start-ups is to look into loans for their new business. Almost all banks offer a business loan service.

Loans are a well understood financial service and are available in many forms. Most people will be familiar with the idea of a mortgage, where money is loaned according to the value of a house and repaid over many years with a certain amount of interest added. The customer benefits by being able to invest a large sum above their current spending power and the bank benefits by a long term return on their investment. Business loans work in exactly the same way, except such loans usually have a much shorter repayment cycle.

Business loans are often negotiated with banks to suit the specific circumstances of the company. Interest rates depend on the bank’s perceived level of risk with the investment so a higher risk loan commands a higher interest rate. This ensures that the bank covers its costs on average, despite some clients who may default.

With the recent dive in credit, many small businesses have found financing more difficult to source. Thanks to government targets under project Merlin, banks are now aiming to make funding more available to small companies by lowering interest rates. This is very good news for those looking to source new business loans.

Before any business can start trading, it has to cover its start-up costs so that it actually has goods or services to offer. These can take the form of the staffing, hiring, property rental, equipment and transportation fees involved in getting the business off the ground. Though all businesses need to cover their costs, not all forms of business finance are ideal for all companies, so make sure to choose carefully.

The most common form of financing involves taking a loan from a bank. Virtually all banks offer specialised business loans intended specifically for this purpose. Loans can have a wide range of repayment schedules depending on the amount borrowed and the specific circumstances of the business in question. To get a bank business loan requires a certain amount of trust from the bank. No bank wants to loan money, only to have the business default on their loan and become debtors. Neither party benefits from this in the long run. Banks will want proof that the company will be able to pay back the loan plus interest, which means a convincing business model and evidence of past performance. First time start-ups will generally take out much smaller loans than established companies, so less evidence is needed.

A popular newer method of financing involves adding value to company invoices in order to get hold of a steady flow of cash. This method is popularly known as invoice factoring or invoice discounting and lets companies’ access cash before transactions are completed. Factoring companies include Touch Financial, which offers a high advance rate for more instant cash.

When business finance is needed, there are several important steps to consider. Firstly, companies should create a business plan, as a tool to attract the kind of funding that is appropriate to the business. Then, they need to ensure the business is geared up to seeking and managing financial investment, with all that this requires. Finally, businesses should consider whether private equity investment might meet their needs.

The Business Plan

The business plan is an essential starting point that should map out the company’s planned route to success. This is a key document when seeking business finance and should be as comprehensive as possible, whilst not being overlong or unwieldy. Make sure the plan has an executive summary outlining the key conclusions from other, more detailed sections, such as organisational structure and details of key personnel; market research and marketing plan; information about systems for financial management and financial projections. When seeking business finance, other components may include cash flow forecasts, arrangements for loan repayments and any contingency plans.

Essentially, the business plan is a tool to communicate to lenders, or other investors, the business vision, aims, objectives and goals. It should clearly outline how any funds will be spent and the likely benefits this will bring to the business as well as to the investors themselves.

Investment Management

Being well prepared will make a great difference to the outcomes of any discussions with potential investors. It is imperative to clearly state what is needed, why it is needed and to demonstrate how the benefits will accrue – this is where a sound, robust business plan will be an advantage. Businesses that demonstrate that they are geared up to, for example, repaying business loans as part of their cash flow projections, stand a better chance of being considered by lenders as ready for investment.

Private Equity

Equity finance moves investment to another level. Consider whether the business has a potential for high growth, so as to make a share in the profits a genuine reason for a ‘Business Angel’ to want to invest?

Of course, it is always prudent to take financial advice when considering investment at any level.

Financial risk assessment is a term for an evaluation of a company’s economic standing and its ability to meet financial commitments. This means that department heads submit reports, spreadsheets and other financial assessment tools to senior management risk managers who then use the data to keep a company from experiencing financial losses.

There are two types of financial risk. The first is a market risk and it is an unfavourable change in security prices that lead to loss in a business ledger balance. Fluctuations in foreign exchange markets and adverse currency price variations may be the contributing factor in a market risk scenario. For example, if a company’s portfolio is appraised at £100 million and because of a decline in a foreign exchange currency, its portfolio is devalued to £88 million, then it has incurred a £12 million loss.

The other type of financial risk is a credit risk. In this scenario, if a business partner fails to reimburse a debt on the due date, the company then incurs a credit loss. If a security or financial institution buys a stock at £20 and five days later the stock is worth £13, then the institution incurs a £7 credit loss. In other words, any inability to produce the desired result through the unfavourable actions of a business partner defaulting on a payment will result in a credit risk.

To help define and prevent these scenarios, businesses implement operating instructions to act as controls to avoid losses, either through human error, market fluctuations or technological malfunction. A financial risk assessment helps risk managers evaluate and prevent the potential for loss in corporate transactions.