Top tips to secure business finance

All businesses, at one time or another, will want access to some kind of finance. With the credit crunch biting hard, businesses would be well advised to prepare well in advance before making any requests for borrowing. Hopefully, the tips below will help businesses make those preparations – and secure them that essential money. First things first, a lender will lend money according to the risk of any proposition, in other words, how likely they are to get their money back. Most lenders will ask to see accounts (usually the last three years) but there will be different requirements for start-ups and businesses that haven’t been trading that long.
If your business needs finance, you would be wise to seek professional advice. As with most things, shopping around can usually secure you a better deal. A good finance broker will be able to help you get the right kind of finance for your business. Brokers who are members of the National Association of Commercial Finance Brokers all adhere to an industry recognised Code of Practice, so if you use a broker with the NACFB logo, you know you’ll be getting good advice.

But whether you decide to use a broker or go it alone, there are some things you can do that will help you secure the finance you need:-

1. Preparation is everything

As a business owner, you need to prove to your lender that you are on top of your finances. A business owner who is, is likely to be a better risk than one who isn’t. Preparation means that you can ask for an overdraft before you actually need it – a far better sign that you are in control than asking for it two weeks after you’ve actually gone onto the red. If you make sure you’ve got a few early warning systems in place you can see well in advance if things start to take a turn for the worse and prepare accordingly. The best way to spot trouble coming (and reassure your bank manager that you are a responsible borrower) is to plan your budget, forecast your cash flow and most importantly, to check them against your actual figures on a regular basis.

2. Cash is king

A business can survive for years without making a profit. It can’t survive more than a few weeks if it runs out of cash. It’s a cliché, but cash is the lifeblood of a business whether you are a corner shop or ICI. Cash isn’t just money in the bank, although money held in current and deposit accounts is part of it. Cash can be money in your back pocket and also any borrowing facilities you have agreed with your bank. If the business still owes money to its creditors and all of these sources have run dry then it has problems and at worst could go bust . There may be times when you need to sacrifice profit for cash – some special offers for example for example may mean you break even, or even make a loss, but they can release cash which will allow you to pay your bills and keep trading. The best way to avoid cash flow problems is to spot them coming, and the best way to spot them coming is to plan your finances. 3. Having cash in the bank does not mean you are making a profit (and, conversely, making a profit doesn’t necessarily mean things are going well) This is related to ‘cash is king’ (point 2), but is actually saying something a bit different. It’s quite easy to confuse cash in the bank with profit and profit with success. Many people confuse the different book keeping terms which appear very similar on the surface but actually mean something quite different. Profitable businesses can still go bust. If the cash isn’t coming in, and there is nothing to pay the bills with, the business will fail – no matter how profitable it might be.

4. Mark-up is not the same as gross profit margin

If an item costs £100, and you want to add a 20% mark up – the item will cost your customer £120. BUT your gross profit is 16.6% (£20 as a percentage of £120). In other words if you decide to have a sale, aim to break even, and then announce “20% off everything” you actually end up making a loss. (20% of £120 is £24 – which means for every item that cost you £100, you only get £96 back.) However, sometimes rule 1 applies and there may be times when it’s worth sacrificing profit for cash.

5. Do a SWOT analysis

SWOT stands for: Strengths; Weaknesses; Opportunities; Threats. Take a long hard look at your business using this model as a starting point. There’s a good chance your bank manager will – and it’s a good opportunity to pre-empt any questions he might have. Strengths and weaknesses examine the business itself; its internal processes procedures structure and people. It might help to ask yourself questions about your business such as: What are its unique selling points? What are its weaknesses (and what can you do about them)? Opportunities and Threats relate to external factors which you probably have little control over, but still need to be aware of, and plan for.

6. Remember the 80/20 principle

The 80/20 rule states that in many cases, 80% of the consequences come from 20% of the causes. For example: try not to have more than 80% of your debt held with less than 20% of your customers. If you are reliant on a few customers for the vast majority of your income, what happens to you if they refuse to pay? Or alternatively, look at your suppliers. Does more than 80% of your materials come from less than 20% of your suppliers? If you operate in a specialist market that might be the case – so what happens if your suppliers go bust? Where will you get you material from? Applying this rule might highlight some of the threats to your business. (See SWOT analysis, point 2)

7. Never assume!

The finance you think you need may not be the finance you actually need. This is another area where a NACFB broker can help. Although you may think that you need a loan to buy your equipment or an overdraft facility to help with your cash flow, a good broker will explore all the finance options with you and find you the best deal for your business. For example, instead of a choosing business loan to buy your equipment, a broker might recommend a leasing arrangement as more suitable. Perhaps instead of a traditional overdraft, the flexibility of a factoring arrangement will give your business the cash injection it needs. Careful preparation shows that you have considered all the options and are aware of the risks to your business. Which makes your business less of a risk to the bank or specialist invoice finance company. Factoring, Invoice Discounting, Invoice Finance