When we talk about funding, your mind may instantly wander to the likes of large loans and investment that covers the entirety of your business. However, with the lending market now more diverse than ever, there are many alternative solutions that your company can utilise.
Due to this, it’s now possible to find funding solutions that work with the different elements of your operations. Doing so will allow you to fund the daily processes involved in your enterprise and even use them to release working capital that you can invest elsewhere.
Furthermore, knowing the different types of funding available and how to use them can improve your cash flow as a whole, placing you in a better financial position and helping things to run smoothly.
In this blog, we have broken down the individual parts of your regular operations and provided you with a few of the options that you can utilise for each.
Supply chain
Having the materials and supplies you need is key to ensuring your business is able to create the products or services you sell to fulfil customer demand. This is vital to enable you to maximise productivity and deliver effectively to your customers.
Coping with unexpected or large orders can put a large strain on your business’s cashflow. Luckily, there are a number of sources of finance you can utilise to pay your supply chain and free up working capital.
The first of these is trade finance, which applies to any supplies you receive from overseas providers. Trade finance works by a lender funding your imported supplies to fulfil orders you already have in place with your customers.
When you are ordering supplies from abroad it is not unusual for you to pay 50% on order and 50% on shipping. Using trade finance means the potential funding gap is closed between the time you pay these suppliers and whilst you’re awaiting payment from your customers – enabling you to pay your supplier for the imported goods.
Not only does this keep your supplier happy, but it also means you can speed up the process of completing your orders without having to front the cost of your materials immediately. This allows for more flexibility in your cash flow and payment schedule.
Supply chain finance is a similar measure you take advantage of. It works in the same way as trade finance – with a lender providing the funds for you to pay your suppliers – except the supplies do not need to be imported from abroad. With supply chain finance, your orders may be funded as long as you have purchase orders from your customers, allowing you to obtain the funding you need while still giving you access to the materials you need for production.
Both options allow you to extend your payment terms: your suppliers are paid straight away by the lender, and you will then repay the lender when you receive funding from your customer. If you utilise invoice financing, then you can receive your client funding quicker allowing you to pay off the trade or supplier finance which tends to be more expensive. This means it’s a win-win, with the different parts of your supply chain able to get paid on time and reduced pressure for you.
By utilising trade and supply chain finance, you can increase cash flow while maintaining optimum productivity across your daily operations.
Customer payment
A common blocker for many small businesses is getting paid on time from customers. While a few late invoices may not seem a huge deal, it can be the difference between a financially stable business and one struggling to cover its recurring costs.
One way to alleviate this is to utilise invoice finance. With invoice finance, a lender will pay up to 90% of the money owed to you through any outstanding invoices with your customers. So, you can get the funds quickly instead of waiting for payment, the amount you draw down from what is owed to you is completely within your control. The invoice finance company normally secures their debt by having a debenture or fixed and floating charge over your debtor book and will also ask for a personal guarantee from the directors, but this can be for a negotiated amount.
This is split into two types: factoring (where the lender takes control) or discounting (where you take control). With factoring, payments from your customer are made directly to the lender. With discounting, payments can still be made to you, so you don’t have to disclose to your customers that you are using invoice finance.
There are some limitations to invoice finance. You need to make sure your customers are able to pay you in the designated time frame given by your lender, typically 90 or 120 days, as you’ll otherwise need to repay the monies that you have borrowed.
If you find late payment an ongoing issue for your company, invoice finance is an excellent solution to reduce the subsequent strain on your cash flow.
Plant and equipment
Equipment is an integral part of any workplace, whether it’s in your product line, offices or somewhere else. Plant and equipment are often your highest value assets, such as machinery and technology, making them ideal for releasing working capital into your operations.
One way that funding can work in conjunction with your assets is through leasing or hire purchase. If your company requires new equipment to meet demand or achieve growth, leasing or hire purchase can allow you to obtain it without having to invest vast sums of money upfront.
Instead, you make regular payments, spread out over many months, usually 3 to 5 years. With hire purchase, full ownership of the equipment reverts to you once the balance has been paid off. With leasing, normally either you need to pay a peppercorn rent each year or a one-off fee to take ownership of it.
If you already own the equipment, you can utilise sale and leaseback to free up cash to use elsewhere in your business. With this option, a lender buys your high-value equipment and then leases it back to you. This might give you sizeable funds to inject into your operations, while you can spread the repayments over a longer timeframe and still have access to the equipment you need to operate.
Research/innovation
If your company carries out research and development in search of innovative new processes or products to fill gaps in the market, there is funding out there specifically for this.
One such way is through loans and grants, which are focused on particular elements of innovation in specific sectors. The government has a support finder tool to help you source such funding, though you will have to meet set criteria to be eligible for the different schemes.
However, another way to fund your innovation in your SME is through claiming R&D tax credits. As the name suggests, these are aimed at encouraging research and development in business. They are part of a government reward scheme. The scheme mainly applies to companies that are utilising science or technology to evolve their products and processes. The tax relief provided by these credits could be up to 33p per every £1 spent on qualifying Research and Development activity.
Get funding advice
By understanding the different avenues of finance out there for you, you can utilise them to support your cash flow and enable your business to release equity for investment or other expenditure.
As alternate solutions grow in popularity, more and more parts of your operations can become a source for lending. This allows more flexibility than a traditional loan and can aid your daily processes while simultaneously giving you access to the funding you need.
If you need guidance on the different funding solutions available and which may be appropriate for your operations, we can help. Our expert advisors can discuss the options out there so you can find the right ones for your unique requirements.
Please call the team today for a free consultation or email [email protected].