Ask the Expert

What type of finance options are best for smaller businesses?

During uncertain economic times, I’m often asked by smaller businesses how they can tackle the ‘financial barrier’. By this I mean customers paying late, banks increasing their lending criteria; making it unattractive to invest in your business or simply impossible to borrow.

This can have huge impact on any business and the wider economy with thousands of small businesses failing to increase productivity and investment in the local and wider economy.

There are however some solutions to help break down this barrier. The main ones being Invoice finance and Asset finance. This brief article will discuss the pros and cons of both.

Invoice finance simply ‘funds the gap’ between sales and receipt of payment. This can be seen as a flexible and structured method of funding cashflow. More importantly funds can be made available within 48hrs.

There are different areas of invoice finance, such as factoring. This is where the lender takes control of a business’s sales ledger and therefore controls the management and collection of any payments. This can be seen as an advantage leaving particularly smaller companies to focus on their core business activities. However, factoring is not confidential, your clients will be aware your business is using a factoring company to manage your receipts. This is also one of the more expensive options.

Another option available is that of discounting, where the business remains in control of its ledgers and chases payments. This option is confidential to its clients but is usually suitable for larger companies.

Spot factoring is arguably more flexible, short-term option. This is where a company sells an individual or a series of invoices at a discount to a lender.

Overall invoice factoring is a flexible way of raising working capital, it allows to free up staff to work on other areas of the business instead of chasing payments. Collections will be quicker and available funds will grow with the debtor book to help fund expansion.

Asset finance is another huge range of products that offer depth and flexibility for any business. Particularly if a business is seeking to obtain equipment. Options include Hire purchase, Finance leases, Operating leases, Capital Release. The beauty of these products overall is that due to the lower payments, you improve your overall cashflow, there are also considerable tax advantages; corporation tax can be offset against your payments, VAT can also be reclaimed (HP) as with any lease you are protected against obsolesce and depreciation, payments are fixed and not affected by interest rates.

Unlike overdraft facilities for example, asset finance agreements cannot be withdrawn, but they can be repaid early. In addition, there is a much higher acceptance and turnround rate; usually a decision is made within 48hrs as finance is secured against the asset.

Overall Asset Finance tends to be a far more flexible option than a business loan.

If any businesses wish to discuss these finance solutions or others, please feel welcome to email me sjohnston@kingstonfinanceltd.com

Commercial Mortgages | Business Funding