I’m expanding my business but I’m not sure what sort of funding I need?
I’m guessing that you need help funding different elements of your business expansion? In which case, it’s probably best to split the borrowing up into different agreements and match the terms to your needs.
You’re right, but why would I want more than one liability?
Do you recognise this scenario? You take on a new member of staff to sell your products. They need a van, you need extra stock for them to sell and of course you are going to have to pay them wages before they actually start generating any income. In this scenario, you’re funding both working capital (wages and stock) and asset purchase (van).
Why don’t I just apply for a term loan, cash flow loan or even look at peer-to-peer lending to cover everything?
Yes, any of those would work but you need the funds for different purposes and, more likely, for different periods. Your stock, for example, will hopefully be sold within a few months, so you don’t want to still be paying for it in 2 years’ time.
Good point. Tell me more . . .
Ok. It may take your new employee 3 months to start generating sales to cover his wages and the extra stock that you had to buy, but the van is probably going to be an asset to the business for a lot longer than 3 months. Therefore, why the rush? It’s unrealistic to expect to cover the cost of all three in such a short period.
So, what are you suggesting?
Let’s look at paying for the van. You could use Asset Finance over say three years because of the longer-term benefits to your business and look at one of the other options for the relatively short-term working capital requirement to cover wages and stock.
Won’t this make it more expensive?
No, it should actually reduce costs. Why? Because the Asset Finance company have the security of the van to lend against, whilst the amount of the other funding – which is likely to be more expensive because it is unsecured – is now reduced because you have taken the van out of the equation. Also, you are paying for the van over say 3 years, which obviously reduces the monthly cost.
Are there any other advantages?
You’re actually asking each lender for less money, reducing their risk, which might make it more attractive for them. That could be reflected in the terms they offer you.
That all seems to make sense, but are there any downsides?
The main one is that you could end up dealing with more than one lender – and more paperwork. That said, lenders will often be asking for very similar information so it could be a case of duplicating the answers. If this leads to the best and cheapest solution, then the extra time will be well spent.
Is there anything else that I should be aware of?
There is nothing to stop the package being made up of more than two products. An extra option, for example, if you are trading in a business to business environment and raising invoices. You could also include Invoice Financing to bring your sales income forward.
Article by Alternative Business Funding
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