Friday, 27 June 2014

26 June 2014 Business finance improving, says Cable

The UK is “on the cusp of a very big break through in business finance”, according to the secretary of state for business, Vince Cable Speaking at the launch of a new guide to small business finance, produced by the British Business Bank, ICAEW and 17 other business and finance organisations, Cable outlined a positive picture for the growing army of UK small business owners and entrepreneurs. Pointing out that difficulties accessing finance have been a historic feature of the British business landscape, he said that things were definitely improving. He explained that while early business start-ups are often funded by what he referred to as “friends, families and fools”, and while at the other end of the scale there’s the stock exchange, there’s a huge gap in the middle. “It’s known as the Valley of Death. At least today there are now some oases appearing in this desert. This new guide will help small businesses seeking finance to find those oases.” The Business Finance Guide – a journey from start-up to growth is targeted at anyone running their own business and highlights the wide array of finance types now available to businesses of all size and stage of development. David Petrie, head of the ICAEW’s Corporate Finance Faculty and co-author of the report, said the crucial issue was timing. “What is crucial for business success is to get the right type of funding at the right time. This guide will help businesses achieve that.” Petrie added that because of the unique nature of the partnership behind the report, it would be sure to reach a large proportion of the UK’s 5 million SMEs. “The guide is supported by 19 partner organisations including ICAEW and the British Business Bank. It’s the first time this has happened and together they represent over 1 million members.” Also speaking at the launch, ICAEW’s chief executive Michael Izza highlighted how quickly the finance market in the UK has shifted. “Even since the Breedon Review in 2012, the market has got more complicated. This guide will help people find their way through the complexity. Really this guide is about building on the work done by the Breedon Review. It recognises that if there is not necessarily a shortage of funds, there is a challenge for those running small businesses in being able to be up to date with the new forms of finance.” The guide, which is available free to download here, covers all the various funding and finance options open to small and growing firms as well as pointing readers in the direction of further advice, help and information.

With thanks to Richard Cree of Economia

Monday, 23 June 2014

The changing world of funding part 3

Asset Based Finance

Following on from Part 2 we continue to look at Asset Based Finance with a look into the costs. This is very timely with an article in the Times newspaper today
regarding some of the practices of asset based lenders which remains an unregulated industry. It has to be said that the Asset Based Finance Association are making moves to clean some of the practices of the industry but the article highlights the fact that there are often hidden charges "in the small print". The article refers particularly to termination charges/penalties. This has long been an issue for buyers of businesses where they want to use their own providers of finance. Often the agreements specify prohibitive costs for transferring title in the debtor book. Having control of the debtor book is seen as important for a purchaser of a business since they do not want a third party being heavy handed with "their customers" and simply collecting in.

The point that the above raises is that the cost of Asset Based Finance is not simply about interest charges. The following ought to be considered when making comparisons between alternative providers of finance and indeed, when comparing with other sources of finance. look out for the following costs and charges and also examine the interest rates;

Arrangement Fees / non-refundable commitment fees
Due Diligence and audit costs / annual maintenance fees
Unutilised facility fees
Covenant compliance fees
Termination fees (referred to above)

Other things to consider are your own company costs of reporting and being compliant with the lending agreements.

Whilst Invoice Discounting or Factoring can be an effective way for a small business to get funding for growth, business owners should be aware that it can increase the complexity of the business. It is critical for businesses to manage their cash effectively whether you have Asset Backed Financing, or not. Secantor can help with this process through helping to plan the funding requirement and to source the correct mix of funding.

In Part 3 we will continue with the Asset based Finance theme and extend it into other areas, particularly the all important supply chain.

The changing world of funding part 2

Asset Based Lending

In part 1 we talked about the growing importance of asset backed lending ("ABL" ) and the decline in overdraft lending. We covered ABL facilities against debtors and also touched on stock which is viewed as a more risky lend, due to the greater uncertainty around realisable values. In part 2 we will be discussing ABL facilities in a little more detail starting with a re-visit on debtors.

Debtors often form the largest class of asset against which facilities are provided. These facilities come from all of the clearing banks but also a multitude of specialised lenders. There are a wide variety of sources of debtor finance. So what are the considerations from an SME perspective.

Management need to consider how their businesses debtor book will be viewed by the lender. Factors to consider here are the size and quality of the debtor book. The incidence of bad and doubtful debts and the quality of the  customers from whom payment is due to be received. Customer concentration is also a key consideration, with lenders looking for a good spread to reduce their risk. The nature of the debts is also very important, with debtors looking for a "book" which is easy to collect out in the event that the business gets into trouble. This often precludes businesses who have long term contracts with their customers, or substantially reduces the percentage that lenders are prepared to advance. Warranties that are provided to customers are another factor which might lead to a customer holding back payment if for any reason he felt that the business maybe unable to fulfil a warranty claim. Often SMEs are asked to consider insuring, either in part, or in whole their debts which of course adds to the cost of asset backed lending.

There is now a very sophisticated market in credit insurance with many specialist credit insurance brokers throughout the country. In reality, credit insurers often  have as much interest as suppliers as to whether a business survives or fails and we now see the insolvency, and turnaround professions working very closely with the credit insurers. If a credit insurer withdraws cover then an asset backed lender may refuse to advance funds on that debtor account. This puts the supplier in an invidious position. He can continue to supply but he needs to consider that the withdrawal of  credit insurance means that the risks have significantly increased. If he continues to supply on credit the business not only needs to fund this, probably out of its own resources, but needs to fully understand the business exposure to a possible bad debt. An alternative is for the supplier to demand pro-forma payments but this may not be possible from a customer perspective.

Clearly, the percentage that an ABL facility provider might advance is a key consideration, but this also needs to be considered in light of the "clawback period". Debtor finance will only be in place for a period following submission of an invoice to a customer. The business needs to look at the payment cycle of its customers and to understand any variability and as importantly the reasons for variability in that payment cycle. Whilst and SME will have terms of trade with its customers and these might typically state that an invoice is to be paid 30 days following the month end of submission, the reality is often very different. As a consequence, a lender might have a "clawback provision" for invoices that remain unpaid for a period of anything between say 60 days and 180 days of the month end, following submission of the invoice. Clearly, from  the lenders viewpoint if it has not been paid by then, will it ever be? Sales invoices being time barred from the factoring or discounting facility can have a devastating effect on cashflow. The SME needs to keep on top of its aged debtors and to quickly understand reasons for non-payment and resolve them.

In part 3 we will be looking at further implications for SMEs in deciding whether Asset Backed Lending, is right, or not before moving on to look at other forms of funding that should be considered in different circumstances.

Friday, 20 June 2014

Become part of the Secantor community on our Linkedin page

Why not become part of the Secantor community and join us on our LinkedIn company page. Share views on SMEs and the type of help and support required to grow their businesses.

The changing world of funding part 1

The striking feature of bank lending over the past few years has been the increase in asset backed lending and the decline in overdraft lending. Arguably, this has not necessarily been to the benefit of the customer who perceives overdraft facilities as flexible, and easy to use. Of course, on of the key reasons for the decline in overdraft lending has been the decline in the security available on overdrafts as a fixed charge over book debts (often the major realisable asset in a business) is no longer available.
Of course there is an argument to say that asset backed lending, particularly in the form of invoice discounting or invoice factoring, is appropriate for growing businesses. Whilst there will be a lending cap, such a facility enables the business to attract more funding as its turnover grows and as its debtor book (outstanding sales invoices) grows. Of course, the opposite is also true in that a decline in turnover will lead to a decline in funding. You may say that is not relevant if you have a young growing business, however, problems can arise if there are temporary dips in trade which may lead to short term losses that require funding, and asset backed lending can be seen as inflexible in such circumstances.
I the late 80's there were a number of American banks that entered the UK market who were not only prepared to fund debtors (at 70% - 90%) but also stock, commonly at around 50%. There were, and still are, a number of issues that surround the funding of stock. Some of the key issues are whether the business actually has title to the stock, since suppliers often have retention of title ROT clauses in their terms and conditions of sale. What these provide for is that the goods supplied remain theirs until such time as they are paid for. Often when one looks at the make up of stock within a business a large part of the raw material stocks will be covered by ROT clauses and these will be eliminated in a funders calculation of what they may be prepared to lend. Another key issue for a lending against stock is its likely realisable value in the event of a forced sale being required. With debtors where the contract has completed, but for payment, realisations should be high in the event of a business failing, since legally the customers would have no reasons for non-payment. However, the situation is very different in relation to stocks where any attempt to shift large quantities of finished goods will often require very significant discounts to be given to customers or other buyers of goods.
Before a business approaches a funder it is very important to understand the "art of the possible" and what is the appropriate funding mix (debt/equity) that is right for your business. Watch out for part 2 where we will discuss this further.

Tuesday, 17 June 2014

The climate is good for scalable investments and disruptive technologies, but what about zombie companies and the threat of interest rate rises?

The tax climate has arguably never been better for investors and particularly those wishing to take advantage of the tax breaks available through EIS and Seed EIS.

Many of these investors are looking to back disruptive technologies that can break new ground and shift the playing field. They are looking for opportunities that can be scaled quickly, on a worldwide basis, through digital marketing channels. At this end of the spectrum, the pace of change is both fast and relentless, driven by the need to retain "first mover advantage", particularly where it is difficult to secure IP on a global basis.

At the other end of the spectrum we have what has become known as the "zombie companies" that remain constrained by both their debt and their often outdated business models. These companies are in a circle which is spiralling the wrong way. Now that the indicators are there for interest rates to rise this could force the position, and these businesses should seek help whilst they still have options.

At Secantor we have the resources and capability to deal with both ends of the spectrum, and everything in between. It is not just about knowledge, although that is hugely important to us as an organisation, where knowledge sharing is a way of life, but also about our connections and credibility with providers of both debt and equity.

Nigel Bacon
Secantor CEO
Fulfilling Business Potential

Sunday, 15 June 2014

Secantor partners with Fleet Innovations

At Secantor we are not about selling intellectual property we are about knowledge transfer to enable businesses to fulfil their true potential. Much of this comes from our highly experienced and technically accredited people. However, part of it is about understanding some of the latest products that are in the market place that can help our clients become more efficient. An example of this is the PEAK mileage capture product from Fleet Innovations .  Read how you can use GPS technology to take the strain out of mileage expense claims.