Where to go when the banks say no
Christian Roelofs outlines some of the financing options available to companies that are struggling to get money from their bank.
Until the banks start lending at the same rate and with amounts akin to pre-recession times, as a construction company looking to grow you will inevitably have to seek out alternative methods of funding to secure the financial support you need to get ahead. So what’s out there?
Sale and lease back is an option that helps to free up cash in the company. You sell your assets, usually machinery, to the leasing company for a fair market price in cash, and then you pay monthly instalments to cover the usage of the asset. There are a number of ways to lease, but of course the point to bear in mind is the leasing company owns the assets; you will just be paying to use it.
If you’re leasing you can structure the lease to cover just finance on equipment or you can roll in all operational costs as well (for example, servicing and maintenance), so it’s possible to outsource all finance and running costs of the equipment and reduce your administrative burden.
A lease can be better than a loan, as a loan is repayable no matter what the usage of the asset you have purchased. Leasing generally offers greater flexibility, a shorter-term commitment and can be a lot more controllable from a cash flow point of view.
Factoring or (confidential or otherwise) invoice discounting are similar short-term funding solutions where money is borrowed against the value of your invoices. Invoice finance can be used to help regulate cash flow and also help avoid cash flow problems caused by late paying customers. And, since someone else is collecting the invoice on your behalf, it saves additional administration. For an additional fee the lending can be non-recourse so that the risk of financial default passes to the funder.
It can be a good option for some construction firms as, rather than waiting for big invoices to be paid, the lender can pay a percentage of the invoice, usually between 70% and 85%, within 24 hours into your account, so materials and labour can be paid for and cash freed up to bid for other jobs, rather than having to wait 30, 60 or 90 days for payment from the customer. This form of lending is not always available where the debt is not “clean”, that is, there needs to be a clear and defined event for which payment is due and final.
Fees for factoring are usually fixed rate interest against the amount of each invoice, plus a service fee. With a factoring firm the monthly service fees are on-going and payable regardless of whether funding was required in a month or not.
It can also be a disadvantage to some who like to keep a close eye on their finances.
Asset based lending
Using a combination of property, equipment and receivables financing, asset based lending is a means by which a company can leverage additional value from its balance sheet.
Typically, loans can be based on assets such as property, materials, stock, plant and equipment, but lenders can offer finance secured against a range of other assets. It can be quick to agree the terms, and a single provider adds to the simplicity. However, the size of the facility can sometimes be less than if each asset was financed individually and there is the risk that if the loan is not repaid, key assets will be seized.
Private placement corporate bonds
This is where a business sells bonds or shares without offering them for sale on the open market. Investors could be high net worth individuals or insurance companies, for example. It can be used to help expand your business or finance mergers and can provide stability for your company given that it’s a longer-term investment. It’s often possible to raise a good amount of finance quite quickly this way and allows you to choose your investors and to keep the company private as well as being relatively flexible.
However, it can be hard to find the investors, and you generally have to offer a better deal than you might do publicly to mitigate the risk for the investors.
Peer-to-peer lending and crowd-funding
Peer-to-peer lending allows individuals to lend money directly to small or medium sized companies. It creates a direct relationship between the individual investor and the company, so there is no need for the involvement of a bank. It is predominantly a for-profit activity. A web search will provide plenty of leads to sites that can facilitate this relationship.
For small firms, another option could be the relatively new concept of crowd-funding, where individual investors pool their money together, usually via a website, to support a business or specific project. There are two types: equity and debt finance.
Debt crowd-funding finance is similar to peer-to-peer lending, where you can raise funds by accepting loans from a series of small investors. Equity crowd-funding finance is where you receive funding from many investors, each receiving a very small piece of equity in the business.
One disadvantage is that it can take a while to secure the money, but it does have an added benefit of giving you access to varied expertise from the multiple investors as they often wish to be involved in promoting or providing support to the businesses they invest in.
Finally, in the future there may be the option to gain funding from the government’s proposed “business bank”, which was announced in September, although when this might come to fruition and its scope are still to be determined. Common sense dictates that you plan early for any funding requirements as the process is harder and longer than historically was the case. With a well-thought-out case and perseverance, funding is generally available if you have left yourself enough time and are approaching a broad audience to give yourself the best chance of success.
Christian Roelofs is a director at business adviser Grant Thornton UK