Guide for Financing Small Businesses
Obtaining funding for small businesses whether established or new is commonly very difficult particularly where, as is often the case, a would-be borrower has little security that might be offered up or track record to demonstrate resources to service the loan and repay the debt - by definition newly established businesses will not have a track record.
Asset finance to purchase an expensive item of machinery or a vehicle is fairly readily obtained through a finance lease or hire purchase agreement. Such financing deals commonly form part of the overall purchase - a motor dealer often make more commission from selling the finance than he makes profit on the sale of the car.
Loans to purchase commercial property are likewise favoured - the security is within the property itself.
But obtaining sufficient working capital (by which we mean the funds necessary to finance any operation, for example to purchase stock, pay wages and overhead costs etc.) is endlessly problematic, particularly for new businesses that do not have access to private capital, that is either the proprietor’s own savings or from within the family unit. It is also a headache for businesses wishing to expand – with few exceptions an increase in volume needs increased funding.
Sadly, neither governments nor banks ever seem to quite recognise that working capital needs permanent finance just as does property or plant and machinery. Building up your own capital by leaving undrawn profits in the business is the safest (and cheapest) way of funding it but takes time. Overdrafts are an unsatisfactory means of financing a business for anything other that the very short term – they are expensive and vulnerable to foreclosure without notice. Far too many businesses are reliant upon them – and by extension the goodwill and understanding of the bank. Not wise.
It is a little known fact but that the most frequent cause of business failure is a deficiency of funds, not a lack of profitability. High Street banks will rarely provide a loan for working capital, although they may provide an overdraft, but there are other secondary lenders that may be approached. We can advise upon and assist with the preparation of budgets and projections and presentations in support of such applications.
An alternative may be an unsecured personal loan and on occasion we can identify suitable lenders. However loan sourcing is a service that we only offer in conjunction with an instruction to undertake the accounting and taxation affairs of the client concerned.
For any potential new client we would suggest that any financing issue be identified at the outset in the initial free consultation - please contact us for further information.