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Debt Finance – Unsecured Business Loans, Invoice Finance and Asset Finance

Last week we provided some guidance on debt finance. Specifically, we looked at the pros and cons of secured business loans, commercial mortgages and overdrafts. This week we are focusing on unsecured business loans, invoice finance and asset finance.

All businesses at some point require finance. It might be during the start-up phase or during a period of growth and expansion. Alternatively, it might be during a difficult trading period when there is a cash flow issue.

The point is, funding can be extremely beneficial in helping you realise your vision, or survive an unforeseen crisis.

If you haven’t already, we recommend taking a look at our previous articles on equity and debt finance. If you have, then read on to see what other options are available under debt financing.

Unsecured Business Loan

This is arguably the quickest and most convenient way to raise funds for your business. It is well documented that many SME’s are experiencing cash flow problems due to late payment of invoices. However, there is also a lack of available finance to help businesses grow and expand.

One quick and flexible solution that could solve these types of problems is an unsecured business loan. Unsecured business loans are typically accessed by businesses that:

  • Are growing and require an injection of cash to help with expansion plans
  • Require additional working capital to help cash flow
  • Are carrying out a program of refurbishment to their premises
  • Want to undertake a new marketing and business development campaign
  • Are looking to buy new assets such as: plant, equipment, furniture, computers
  • Need to pay an urgent VAT or tax bill

Unsecured business loans are suitable for sole-traders, partnerships, limited company’s and limited liability partnerships.

There are a variety of loan types available. Typically, an unsecured business loan for a business trading for more than 1-2 years can be considered on the following basis:

  • Term: 3 months up to 5 years
  • Interest rate: 5% to 15% is typical
  • Fees: In the region of 3% – 7%
  • Early repayment: No early redemption charges
  • Loan size: From £5,000 up to £350,000

In addition, some lenders also offer unsecured business loans for those businesses that have been trading for less than 1-2 years.

What You Will Need In Advance

Being prepared with up to date accounts

There are numerous options when it comes to unsecured business loans, and funds can be made available very quickly. The key point is making sure that as a minimum, you have the following information available to send to the lender:

  • latest trading accounts;
  • last 3-6 months business bank statements;
  • copy passport for ID;
  • copy utility bill for proof of residency.

Pros & Cons

The main advantage of this type of funding is speed. The lender normally only requires the latest set of accounts together with a copy of the businesses last 3 months bank statements.

To give an indication of how quickly funds can be made available, recently a client instructed us on a Monday, looking for a loan of £85,000 to fund expansion. This including taking on a new staff member and launching a new marketing campaign.

On Monday morning, the client provided us with accounts and business bank statements, and the application was submitted. The loan was approved on the Tuesday morning. All the loan documentation was issued for signature and was returned via email to the lender on the Wednesday.

Funds were released directly into the client’s bank account by Friday lunchtime. Deal done, and funds released all within 5 working days.

One point to remember is that the lender has no security on a business premises or any other company assets. As such, they will require a personal guarantee (PG) from you as the business owner. As a result, think carefully about the commitment you are taking on – PG’s should not be entered into lightly.

That said, unsecured business loans are an excellent form of business finance, particularly if you need access to funding quickly with the minimal amount of fuss.

Invoice Finance

Invoice finance put simply is a lender advancing you the cash due from invoices your customers have yet to pay. Whilst your payment terms might be 30 days, the reality is that your customers or clients sometimes take significantly longer to settle up.

The benefit of invoice finance is a much-improved cash flow position for your business. Invoice finance has become an increasingly popular and effective way of helping business owners to manage their cashflow. It also offers a more flexible alternative to the traditional bank overdraft facility.

How Does Invoice Finance work?

Invoice finance lenders provide you with the cash you need to run your business. In simple terms, here’s how it works:

  1. Invoice – You have sold a product or provided a service and the work is now complete. You therefore raise an invoice with your customer or client. The invoice includes details of how much the invoice is for, as well as details of the payment terms.
  1. Cash Advance – Because you have an invoice finance facility in place, you simply send a copy of the invoice to the lender providing the invoice finance facility. They will then pay you a pre-arranged percentage of the invoice’s value, normally within 24 hours.
  1. Cash Flow – You now have the cash available within your business without having to wait for the invoice to be paid by your customer. Your improved cash flow position means you now have the funds available to assist with working capital and the day-to-day running of the business.
  1. Repayment – Once you have sent the invoice to the lender and received the cash there is little else for you to do. The lender will collect the payment from your customer in due course and then send you the remaining value of the invoice which you didn’t initially receive as a cash advance, minus any pre-arranged fees and interest costs due to the lender.

Types of Invoice Financing Available

This type of invoice finance is commonly known as factoring. In this scenario the lender collects the payment due on the invoice directly from your customer.

The alternative is something called “confidential invoice discounting”. The main difference is that you collect payment from your customers in the normal way, thereby keeping the invoice finance facility ‘confidential’ from your customers.

Confidential invoice discounting is often a more suitable and appropriate way to collect payment. However, to structure a confidential invoice finance facility means you must be able to demonstrate to the prospective lender that your business has an established and effective in-house credit collection process in place.

Invoice finance utilises one of the key assets in your business, namely your debtor book. It enables you to raise funding against it for working capital requirements and so help with the day-to-day running of the business. And increasingly, lenders are offering ever more flexibility when it comes to invoice finance.

For instance, whilst many businesses require an ongoing invoice finance facility, there are other businesses who only want to raise invoice finance on an occasional basis when cash flow requires it.

Should this be the case, then “spot invoice finance” is an option. This is where you only raise finance on an invoice-by-invoice basis to suit your requirements and at times when you have specific cash flow needs within the business.

Asset Finance

Asset finance plant and equipment

Many businesses use some form of asset to trade or to run and operate their business. This can of course include the business premises from which the business operates. We covered raising finance against a property asset when we looked at business loans and commercial mortgages last week.

However, there are other assets that a business needs to trade and operate, and these can include such things as:

  • Plant and equipment
  • Machinery
  • Computer systems
  • Fixtures and fittings
  • Vehicles including lorries, vans and other commercial vehicles

A common problem a small business owner faces, is that buying an asset often requires a large, one-off payment. This can have a negative effect on the cash flow of the business.

Nevertheless, new assets are often vital to help a business not only trade successfully but thrive and grow.

That’s where asset finance can help. It makes buying new assets affordable by spreading the cost over time whilst also enabling the business owner to keep their assets current.

Almost any asset can be acquired using asset finance. From a computer system costing £1,000 all the way up to heavy plant and equipment costing £100,000 and upwards.

Essentially, there are two main options when it comes to asset finance:

Option 1 – Hire Purchase

Hire purchase is a well-known option. Instead of paying a large upfront amount, you spread the cost of the asset over the term of the facility. This is usually a period of up to 5 years, although it can be for a shorter term. One key benefit is that at the end of the contract, ownership of the asset passes to you as the business owner.

Option 2 – Leasing

The alternative is leasing, which allows the use of an asset in your business for a monthly amount. However, at no time during or at the end of the agreement do you own the asset. One advantage of leasing is that the lease deal can often include the cost of any repairs or maintenance that may be required to the equipment during the period of the lease at no additional cost to you.

Refinancing Existing Assets

One other important role that asset finance can play is unlocking cash into the business, that would otherwise be locked up in the value of an existing asset.

For instance, if you own assets within your business that are unencumbered and not currently subject to any finance arrangement, then you can arrange asset finance against the existing asset which has the effect of releasing cash back into the business.

Asset finance provides great flexibility, offering you the opportunity to preserve cash within the business when you are acquiring an asset, or if you already own an unencumbered asset you can release cash back into the business.

Asset finance is of course only one of many different forms of debt finance that a business can utilise to fund growth, cover unexpected costs or preserve cash flow.

The Final Word

We hope that our two articles on debt finance have given you some ideas on the numerous funding options that are available. If you think your business could benefit from some correctly structured debt finance why not get in touch.