Commentary from Gary Cain, Director, Reach Commercial Finance
Financing growth in a business that is not suited towards invoice finance and other forms of asset based lending can prove challenging but this does not mean that it is impossible. In some sectors, such as technology and service industries, there is often an element of contracted revenue that can be discounted to provide a source of growth finance, often by specialist growth and venture debt providers.
This may not be the answer for businesses attached to the retail or B2C market, but there are still finance options available in the form of either loans, or equity, from recognised lenders, the peer to peer market, small debt and equity funds or a number of regional solutions such as the Midlands Engine Investment Fund.
The key to an application involving growth finance is to understand the viewpoint of the lender who needs reassurance over his concerns about the impact of Coronavirus and the resultant lockdown.
These concerns can be addressed by providing financial summaries pre-Coronavirus, demonstrating the immediate and short term impact of the virus and lockdown and how the business has performed as the lockdown has eased. In this way, the lender can gain some comfort that a steady level of revenue has been restored that provides a base upon which to make a lending decision
Business owners are looking for new ways of supporting their growth plans and these can take the form of –
- Invoice finance
- Supply chain finance
- Asset finance
- Trade credit insurance
- Growth equity
- Mezzanine finance
Invoice finance has long been the route to help businesses grow. As the level of the aged receivables grow, the business will be able to see their funding line grow with them. The challenges that many companies will face as they look to come out of lockdown and start to rebuild will be, the level of outstanding debtors could well be low and the some of the outstanding debt may well be past due date. So finding the right funder to assist could prove difficult; there are funders out there with appetite but they aren’t likely to be the names you know from the high street.
Generally speaking, the lower the risk and the greater the volume, the lower the factoring charges. Conversely, the higher the risk, and the lower the volume, the higher the invoice factoring costs. Factoring is a more expensive facility than invoice discounting as the professional credit control function is provided by the factor. Typically business that can demonstrate the ability to carry out their own sales ledger management can benefit from invoice discounting.
Similar to how invoice finance works, by looking at the customer base and the receivables of the business, this form of finance instead focusses on the suppliers and provides working capital finance in the same kind of way as an overdraft – but with the finance only used to pay suppliers. It allows a business to fund the purchase of materials, and turn these into inventory, typical cost would be 0.1-0.2% per day for the amount advanced. These types of facilities tend to have no ongoing commitment, are fairly easy to arrange and can be used as and when required. The businesses directors need to be home owners and present a positive balance sheet. Whilst this isn’t a cheap solution, faster payments to suppliers particularly in these current times can further strengthen the relationship between buyer and supplier, which could in turn lead to the negotiation of a discount and better rates. The lender has to take comfort in the overall strength of the borrower and will often further improve their position by taking credit insurance.
This will allow a business to raise capital against the fixed assets that are held on their balance sheet. The benefit is that it can be quick and simple to arrange, the facility would typically be spread over 3 to 5 years. Costs would typically be 8-12%. As this is a secured from finance (secured on the assets themselves) the rates are likely to be more favourable than an unsecured product such as a loan. Also the fixed interest rate make it easier to budget within the cashflow. Note though that the risk of default could mean losing key business assets and the valuation of the assets is based on market value not what you paid for them so can be valued much lower than expected.
Trade Credit Insurance
Credit ratings are currently taking a battering but even so consideration should be given to trade credit insurance (TCI) to protect often the businesses biggest asset (the debtor book). If your customers become insolvent or fall into protracted default, you will be indemnified for the cost of the goods and services you have delivered. This product often works well alongside an invoice finance line to allow the funder to maximise their funds in use. Quick to arrange and cost effective.
Issues right now are, of course, on ratings and the potential impact on the cost of premiums etc. Some time ago now the UK government announced a £10bn trade credit insurance scheme to prop up the TCI market to prevent a drought in coverage. This is currently delayed in its implementation, but the plan is that it will share the risk between the government and insurers (possibly to the end of 2020).
This usually takes the form of a minority investment in relatively mature companies that are looking for capital to expand or restructure operations, enter new markets, or finance a significant acquisition without a change of control of the business. It can be time consuming to arrange and will not be suitable for all businesses. It will be long to medium term.
Peer-to-peer lending, also abbreviated as P2P lending, is the practice of lending money to individuals or businesses through online services that match lenders with the borrower. The costs of this will be higher than the high street lenders and some invoice financiers. This doesn’t have to be a time consuming process though and, in the main, it will be a medium-term commitment of say 3-5 years.
Typically this form of finance would be for the more established businesses and can be lengthy and costly to arrange.
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