Top 100 Tips for Business - #4 Funding
When someone goes into business for the first time, or prepares to grow it to the next level, they will typically think about saving or borrowing pots of money they need for set up costs.
However, according to Darren Peacock of Hull’s Peacock Finance, this is a bit of a red herring.
Because it’s cashflow that’s king – and also the thing that can ironically catch the businesses with the most potential, out.
“If a business doesn’t have the cash to balance its income and expenditure on an ongoing basis, it will die,” said Darren.
“And actually the most dangerous point is often when they start to really go places. This is because a growing order book – and more valuable orders – can mean bigger outlay in the intervening time before their bills are settled.”
How do you decide when you need funding?
“Unfortunately, the first time many businesses realise they need funding, is when there is no money in their bank account, and ideally they need to be seeking advice long before that, to avoid running into problems.”
Having a thorough understanding of their money situation is vital.
“The first thing I ask for, when a business owner does approach me for help with funding, is a detailed picture of their finances. Again, many businesses fall into the trap of just looking at their profit and loss, whereas they also need to map their cashflow, to make sure the timings of their overheads (the things they need to source and pay for to deliver agreed works) and customer payments is aligned. Otherwise, they are going to run into problems. And the bigger their contracts and outlay, the bigger those problems are likely to be,” continued Darren.
“Ironically, this often happens when a business starts to really grow, or after a major sales push. Companies don’t go bust because they aren’t successful – they can make losses year after year and stay afloat and there are many high-profile examples, Amazon, Ocado and Twitter, to name a few – they go bust because they run out of cash to cover their day-to-day incomings and outgoings.”
Making sure X = Y is also a fundamental rule of thumb.
Darren added: “If your suppliers expect payments from you in 30 days, and your clients are on 60 days’ terms or, worse still, one pays late, you have a problem.
“So the first thing a business owner must have, is a full understanding of their pattern of cashflow, and from there they can look at a range of funding options to support that. This means keeping management accounts, not just your usual profit and loss accounts.”
OK, mission accomplished, so what help is available?
- Invoice financing. This is one of the best and most cost-effective ways of funding business growth. It fills your funding gap by giving you 85 per cent of the value of your invoices upfront, in return for a nominal interest charge on what is effectively a short-term loan secured on the promise of your invoice. So, for example, if you manufactured aerospace components and won a contract with the MOD, you might have to invest a significant amount in components to build it, but have an equally significant invoice outstanding, which might also be due after your components bill has to be settled. An invoice finance lender would likely be more than happy to advance you 85 per cent of that money to keep you going in the meantime, because there’s very little risk of them not getting paid. As long as you can demonstrate that you have raised an invoice, to a quality customer, raising invoice finance is relatively straightforward. You can also take out credit insurance, though, to doubly protect you just in case your customer does default for any reason.
- Commercial loans. You would typically use one of these to purchase property, with the lender viewing your premises as security.
- Unsecured business loans. These are an option for a specific project and subject to a strong business case outlining the resulting profit from the investment, that will enable you to pay the loan back. For example, you might want to pay someone to produce a marketing strategy for you, or to recruit a new salesperson, and be able to demonstrate the uplift in profit this will bring.
- Secured business loans. These are another relatively straightforward form of funding, for the purchase of capital assets like cars or vans, as long as you can show that you can afford the monthly repayments. They are accessible because lenders know they have the value of the vehicle to fall back on if something should go wrong.
- Asset finance. Similar to secured business loans, this can help you buy large items like heavy machinery that you need to grow your business, and is reasonably easy to come by because of the latent value of what you are buying.
If your business is poised for growth, here is what Darren would advise you to do without delay, to get funding-ready:
- Get to grips with your finances by keeping management accounts. The first thing a funding specialist like Darren will ask you for is a three-month snapshot and bank statements. Based on these, they will be able to tell you what options you have available. Having them demonstrates you are running your business professionally and will get you a gold star straightaway!
Peacock Finance is one of the partners supporting our James Legal – The Business 2017 campaign, aimed at helping businesses in the Hull & Humber region to capitalise on the opportunity this special Hull, City of Culture year represents.
Darren has years of experience in business funding and works with many businesses across the region, including property investors, to help them source the investment they need for growth, in instances where they wouldn’t perhaps qualify for traditional bank support. He can tap into over 300 sources of alternative funding, from wealthy individuals looking to invest in promising ventures, to the major high street banks. If you would like to speak to Darren about any of the issues or opportunities raised in this blog, email him at Darren.peacock@peacockfinance,co.uk or call him on 08455 197 104.
For more information about our James Legal – The Business 2017 campaign, including our Business Booster competition with its total prize fund worth over £39,000 for two stand-out regional businesses, visit.