If your business has been slower to come into profit than expected, and if raising more finance is necessary, what are your options?
By: Nesa Rahmat/
Depending on the extent to which you have committed business and personal assets as security, the options to raising more finance could be limited. It probably makes sense to start off by talking to your bank manager, who may be willing to offer further finance if you have a clear plan to turn things round, the figures are obviously moving in the right direction and/or there is security available.
If the figures are moving too slowly to make sense – or even worse, moving in the wrong direction – then you will have to make some hard decisions. You may be able to find an investor from amongst your friends or relations, but it is extremely unlikely that you will be able to find other outside sources of finance.
If you are still committed to keeping the business going, you will certainly have to slash your overheads and tighten up on your credit controls before raising more finance.
You might be able to scale back with a view to building up more gradually before an attempt at raising more finance. Or perhaps, finding another source of income to finance your outgoings in the meantime. Alternatively, you might consider realising your assets, paying off your loans to reduce your outgoings, and devoting yourself to building up the business from a lower personal base.
But if you have been in business for three years or more and need cash for expansion of our production facilities, then you need other advise for raising more finance. Your first port of call for raising more finance should be your bank manager, who will probably be interested in suggesting a deal, particularly if you need to expand your production facilities because your business is doing well.
- Consider whether a lender specialising in equipment finance could offer a better solution.
- If you have a strong cash flow, consider raising finance through an invoice discounting facility, which typically releases more of the value of your invoices to you than overdraft lending.
- Consider whether the best way to expand might be some form of combination with a business in the same sector, whether by a merger, a take-over or perhaps a joint venture.
If you are searching for an equipment finance, lease or purchase agreement?
Before you sign any agreement, you need to know:
- How long will the agreement run? How many instalments will you be committed to paying?
- Are all the instalments the same size, or – for example – are you paying less initially but a large payment (a ‘balloon payment’) at the end of the term?
- What does the instalment payment cover, exactly? For example, does it cover servicing, or consumables?
- Who has responsibility for insuring the equipment? If you, is the cost of insurance included in your payments, or do you have to arrange that separately?
- Is there a usage (eg ‘cost per copy’) charge, and if so, what exactly is it? Will it be based on your actual or your estimated use? (Be careful: it is easy to be landed with a very expensive contract because of confusion over usage charges.)
- If the payments cover the use of consumables (for example, toner for photocopiers), exactly what consumables will be delivered, and when? What are the delivery charges, if any?
- Who has responsibility for keeping the equipment secure?
- What happens if it does not work properly?
- What happens at the end of the agreement? Does the equipment belong to you? If not, can you extend the agreement, and if so, is this at a reduced rate? Alternatively, do you have to give notice to end the deal?
- What is the tax position? (If you are buying the equipment, you should be able to claim capital allowances; if you are leasing it, you should be able to set the lease payments against your taxable profits.)
- What is the position on GST?
- Do you have to show your financial liability on your balance sheet?
- What happens if you cannot keep up the payments?
And if the bank wants me to give a personal guarantee on my business borrowing, it is effectively asking you to provide security for your business borrowings by committing yourself to repay them – if necessary from the sale of your personal assets, whatever they may be (your house, investments, or valuables).
Providing that you can service the business loan out of the business profits, there is no reason why the bank should ever have to call upon the personal guarantee. However, most personal guarantees are “on demand” which means that if your business fails to make a payment, the lender may be able to make a claim on your personal assets as soon as the due date for payment has passed.
Similarly, if your business does less well than you expect, you (or your creditors) decide to pull the plug on it, and there is insufficient cash to repay your liabilities to the bank, you will be called upon to personally pay any remaining liabilities (subject to any cap or restriction set out in the personal guarantee). So, be very careful if anyone ask you to be their personal guarantor.