Unravelling The Funding Minefield: Advice for SMEs

David Robertson, chief executive of business cashflow provider Bibby Financial Services, discusses the written and unwritten rules of choosing a financing option that works best for your company.

With 60% of UK businesses failing within their first year, securing an appropriate source of funding to ensure long-term business success and profitability remains a challenge for many small to medium-sized businesses across the country.

When it comes to securing the funding to fuel business growth, purchase new equipment or ignite recruitment plans, the golden rule is to research all the options to avoid the costly mistake of rushing in to an agreement with a financier that doesn’t match the businesses long term needs.

For busy owners and managers with many roles to juggle as their businesses flourish and grow, it can be easy to not spend enough time researching the various funding options. However, choosing the right financing is fundamental to the long-term success of a business. Rushing into a deal with the first financier that comes along could be a costly decision in the long term.

Many owners and managers all too often only consider traditional finance such as bank loans and overdrafts when funding their business.

However, there are a number of alternative funding solutions that may be more suitable for the needs of today’s business.

One such solution is invoice finance, which allows a business to raise funding based on the value of its outstanding sales invoices, releasing capital back into the business.

An invoice financier will release up to 85% of the value of sales invoices as they are raised and collect outstanding invoice payments from the client’s customers.

The remaining 15%, less a small service fee will be paid to the business once payment has been received. The invoice financier will also prepare and send out statements, telephone customers and maintain professional and detailed accounts of all transactions.

As well as the benefit of maintaining a healthy cash flow, businesses benefit from improved profitability, as they are able to pay suppliers earlier, buy in large quantities and also take advantage of any discounts.

Many business owners and managers choose to work with an invoice financier to also remove the hassle of chasing outstanding invoices and collecting payment. Instead of drowning in paper work, the business owner is free to concentrate on developing his business rather than chasing outstanding payments.

In order to help small business owners and managers make the best decision when reviewing funding options, a new owner should consider the following tips:

· Seek advice – there is a plethora of advice available on securing the best funding for your business from a number of financial specialists. Find a specialist who understands your business and its requirements and heed their advice before rushing into any decisions

· Involve funders from the outset – involving your funders in the planning process means you can work together to ensure the right deal at the right price

· Be specific – decide how you are going to use the funds. Funders prefer to know precisely what the money will be used for and how it will benefit the business

· Provide information – provide accurate and clear information such as management accounts, details of contract orders, assets to be purchased and any other information deemed relevant

· Inform the financer – funders like to know what the past, present and future positions of the business will be

· Realistic targets – don’t assume you will get the amount you want at the price you want to pay. Planning for different scenarios will help you to manage your expectations and avoid disappointment

· Advance planning – make sure you plan your borrowing time line realistically, allowing some slippage time for unforeseen events

· Timescale – be aware some lenders take longer than others to reach a decision, so make sure you build in plenty of time before you actually require the funding

· Build relationships – finance companies are people-led service businesses, use this to your advantage and find the right partner and aim to build long-term relationships with them

· Communicate – once funds are successfully secured and borrowed, invite the lenders to see how their money has been used. This generates confidence and trust, making further requests for funding in the future a much smoother process

By considering the above advice, owners and managers can to enter into funding arrangements with a clear understanding of how to best manage the process. This will ensure maximum return on investment and maintain a healthy cashflow, enabling owners and managers to focus their attention on growing the business.