Whether you buy and sell potato chips or computer chips, you may need to walk the extra mile when raising finance for your business this year. This post will show you what to watch out for with lenders ...
Remember when last December the UK Government officially made sure for HMRC to receive certain payments BEFORE other lenders, should businesses become insolvent? In particular, the HMRC's so-called Crown Preference pushes lenders against floating security further down the payment hierarchy.
When borrowing money, most trading businesses are able to offer security to a lender that is non-fixed, or floating. Unlike property or firmly installed machinery, stock, moveable plant and machinery, and trade debtors, change their value periodically.
Therefore, this kind of security means more risk for the lender. A few tax and accounting experts predicted that as a result borrowing money against floating security would become more expensive.
If you are a trading business, operate in retail or along the manufacturing supply chain, what should you expect when raising finance so applying for secured funding?
- First and foremost, almost all floating charge lenders ask for personal and corporate guarantees, such as PGs (Personal Guarantees) and debentures.
- Consider lenders who lend against both fixed and floating security such as property and receivables. They will mostly charge lower rates than those lending purely on stock, for example.
- Some lenders tie stock finance to the use of their own invoice finance facilities: Securing finance against your outstanding invoices helps reduce the lending risk.
- Lenders focusing on stock finance can charge up to 36% rates per year, therefore watch out for those facilities with no tie in and no minimum fees or charges while in place.
- When borrowing money against stock and inventory, be aware that some lenders will require confirmed purchase orders for stock, and will lend against finished products only. - Make sure that lenders do not take a fixed charge over stock and other assets you need to freely operate with. This may lock up your business.
Which documents do you typically require for submission when raising finance? In general, prepare for the last two years of accounts, aged debtors and creditors, most recent management accounts, details of current borrowing, a portfolio schedule if property is involved, and a business plan including projections and a director's CV.
If anything I've written here resonates with you, call me on 01604 420057 and let's see how we can help you.