Talking with business owners growing their businesses, I hear varying approaches to funding business growth. Some have understandable reservations using finance solutions to grow a business.
I have prepared a list of reasons why making early decisions can make considerable difference when approaching lenders.
Lenders likes
- Positive trends – A growing turnover monthly within the bank account and a variety of customers paying into the account
- Positive working capital – A growing business with improving cash at bank is a favourable sight for lenders
- Low short term debt – Creditors due within one year are included within affordability calculations
Having a collection of the above provides assurance to a lender that your business is operating from a place of strength and often widens the availability of credit. Not only improving the interest rate you are able to obtain but also the amount that you are able to borrow.
Lenders dislikes
- Hardcore overdraft usage – An overdraft is an important tool for business but when used permanently reduces a business endurance, and increases interest costs to the business
- Arrears with PAYE/VAT/Tax – Managing your tax obligations correctly is an important factor for lenders to consider
- Increasing short term debt – Short term debt such as credit card and overdraft often attracts a higher interest rate and is an extra bill to factor into cashflow
Using cashflow until considering asset finance can affect all of the above and put a business in a weaker position when applying to lenders. Applying for finance from a position of weakness can mean having to approach lenders with higher interest rates and lessening amounts able to be borrowed.
Meeting earning potential
Investing in equipment or vehicles is often to grow a business over a period of time.
Borrowing asset finance smartly is calculating a monthly payment to meet the earning potential of the new equipment. The amount that the business can earn from the new equipment should cover the finance commitment, and all running costs.
This neutralises the cashflow impact of the new finance commitment and often provides a net boost to cashflow over time.
Purchasing vs refinance
Using an asset finance product to purchase assets removes the needs to take money out of cashflow to purchase equipment.
This leaves cashflow in place to manage other expenses such as tax payments, fuel, staffing costs and materials.
The lender pays the supplier on your business behalf and monthly payments begin once the equipment has begun to earn.
There are more lenders in the marketplace offering this type of asset finance versus refinancing. Also as refinancing is often considered a greater risk, the interest rate available is often higher.
Offsetting tax liability
Having a good year in business and expecting a profit at the end of your financial year? You might be expecting a corporation tax liability to shortly follow
Making an investment ahead of the financial year end can eradicate a successful year’s corporation tax bill. Different finance products available utilize tax allowances in different ways, speak to us for more information.
Drip feeding investment into assets could leave capital allowances on the table, that you could otherwise have used to cut down your tax bill.
If you want to explore the finance solutions suited to your business, please get in touch
You can check out examples of how we have been working with businesses here
