Loans
From Entrepedia: The Entrepreneurship Wiki
There are a number of funding options available to businesses that are looking to raise finance. It is a good idea to explore some of the more conventional major asset based, commercial loan and working capital facilities available, in addition to researching grants and equity options. It is highly unlikely that the commercial loan type of funding opportunities, or indeed any type of facility, whether long or short term, will be granted without some form of security.
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Loans and Working Capital Facilities
Some of the longer term facilities are;
- Business Term Loan
Probably the most common form of long term funding, a Business Term loan, has a number of uses such as business expansion, development and an injection of capital into a business. Repayment periods are normally between 1 and 10 years and there will have to be repayments of capital and interest, and all these payments must be built into the business plan and cash flow model. Most banks will be flexible on the frequency of capital and interest payments.
- Revolving Credit Loan
This type of facility will give a business the flexibility and control of drawdowns and repay against a pre-agreed limit. The facility is similar to an overdraft (see below) but over a longer period.
- Asset Finance
This is normally a credit, hire purchase or leasing facility provided by a specialised third party leasing or asset finance provider to fund the acquisition of assets for a business. The provider will take security on the specific asset, and this is usually independent of any other security. The cost of the finance or lease is normally spread over the life of the asset. Assets that are funded this way should have a realisable resale value and so are generally tangible assets.
This type of facility is normally straight forward to organise and the cost of the asset can be linked to its income stream. Since the facility is a stand alone agreement then other lines of credit are not involved and working capital is unaffected.
- Small Firms Loan Guarantee Scheme (SFLG)
The Department for Business Enterprise & Regulatory Reform (BERR) and its lenders developed this facility to assist a small business that may have difficulty in providing adequate security or a trading track record. The key features of the facility are; fixed or variable rates of interest, loan amounts can vary between £5,000 and £250,000 and a minimum term of 2 years and maximum term up to 10 years.
Business Grants
Whilst not strictly speaking a business loan this type of facility can be critical to the development of a business. Subject to the business qualifying, these grants are normally available through various government agencies, local authorities and various enterprise agencies. They usually take the form of either a set amount which is put into the business for a specific purpose or a low or interest free loan. The normal purpose for a grant is setting up a business in a specific area (e.g. economic regeneration), training and research and development.
Property Lending & Commercial Loans
The majority of banks offer various types of business property loans and mortgages. Property finance can be used for the purchase of a business property such as an office, industrial or retail unit, property development or investment and the acquisition of land or property to expand the business.
Short Term Working Capital Facilities
Many businesses have the need for external finance but not necessarily on a long term basis. Under these circumstances a business will require to arrange a short term or working capital facility. The most popular forms working capital finance are;
Overdraft
This facility is not used to buy long term assets or investments. The facility is set at an agreed limit and can be drawn on at any time, and primarily used to clear up accounts payable, wages etc. The key features of the overdraft are its flexibility, paying only for funds used and it is normally quick and easy to arrange. The facility should reflect the business need and based on the business plan and cash flow. The facility is normally reviewed on an annual basis.
However fees and an increased interest rate will normally be charged should the facility exceed its limit and without authorisation. Overdrafts are on demand (or call) and the bank has the right to ask for repayment of the facility at any time. If cash flow problems are identified within a business then the bank should be advised at the earliest opportunity.
Cash Flow Finance
This type of working capital facility allows a business to develop using current sales and stock values. The facility gives the business the benefit of positive and predictable cash flow with, normally, a pre determined %age value of the invoice being paid by the cash flow provider within 24 hours of issue. The two most popular forms of cash flow finance are Invoice Discounting and Factoring. With the former the business retains full control of its sales ledger and credit control, and the latter sees the provider being responsible for collection of the invoice and the management of the client’s sales ledger and credit control.
Invoice discounting and factoring allow the freedom to use the cash in the most suitable way for the business. It offers a predictable cash flow and offers a potentially valuable debt funding package, thus reducing the reliance on a more conventional equity funding method.
- Unless otherwise specified, this information was contributed by Bob Kelly
