We spoke to James Sinclair, a commercial finance expert at Trade Finance Global. Given the complexities and massive changes in the business funding landscape over the past few years, we were treated to a lowdown on the latest trends and key changes in business finance, along with some tips and tricks to consider if you or your company are ever looking for business finance.
At the end of November, the International Chamber of Commerce announced a huge shortage of trade finance, which is deemed one of the biggest sources of funding for small and medium enterprises (SMEs), an industry estimated to be worth over £3tn annually. If you thought personal finance was complicated, try commercial or business finance.
Businesses want to grow, create more jobs, go international, and make more profit. But given today’s landscape of complex trade tariffs, legislation in different markets, and lengthy payment terms from big customers, working capital problems are common in small businesses. “Nearly three quarters of small businesses report that they have been paid late in the past year, placing a huge strain on cash-flow and meaning they struggle to realise ambitions to grow,” according to John Walker, the chairman of the Federation of Small Businesses in a recent survey.
The good news is that business funding is being turned on its head, particularly as a result of a cut-back in lending from big financial institutions and banks due to Basel III regulation. It means that banks cannot leverage the amount that they lend as much as they used to, meaning commercial finance, often deemed as high risk has been on the decrease. Fortunately though, alternative financiers have been quick at stepping up to the mark and servicing the needs of small businesses – offering short term loans, approving overdrafts in minutes rather than months, and listening to businesses that need finance.
We have put together a five-point action plan for any businesses looking for commercial finance:
1 Do your due diligence & plan
It might seem obvious, but we can’t stress it enough.
KYC, also known as ‘know your customer’ could help prevent wasting time. Understanding your customer’s needs, being aware of previous reputation (e.g. County Court Judgements and if they’re known for paying late) could be the deal breaker.
Nowadays, there are quite a few inexpensive or even free tools that businesses can use to do their due diligence on their partners. Sites such as Company Check offer free due diligence sources on companies and company directors, and simple Google searches, and searching social media / Trust Pilot reviews and previous press on Google News are no-brainers which can help give you an indication on the reputation of your customers.
2 Know the difference between debt and equity (and secured and non-secured)
Broadly speaking, there are two types of commercial finance, debt funding and equity / angel investing. The former normally uses some form of security to offer finance, which is payable + interest; the latter involves taking a share of a company or business in return for cash. Often we see that equity backed SMEs burn through a lot of cash as they grow, when in fact they may have been able to use debt finance to bridge certain gaps and let their equity money last longer.
As an example, an SME selling widgets to other businesses raised angel investment to produce and sell widgets, although it found that it was quickly running out of cash whilst servicing customers who wanted the product on lengthy payment terms. To ensure employees and equipment costs were paid, the business had to say no to new customers until that customer paid. This is a very common problem, and a more innovative efficient finance solution could involve securitising the asset – a purchase order or invoice – and taking a debt finance facility instead, such as invoice factoring. This means that the company has cash in the bank, to serve real needs such as paying staff and maintaining cash flow.
3 Be on top of your company payment terms
The Accounts Payable team is responsible for ensuring speedy payment, but all too often, we see SMEs running into financial difficulty. Cloud accounting software can be configured to send out invoices automatically, followed up with reminder invoices, and then track payments being received. This can eliminate the day-to-day hassle. An accounting team should really be focussing on speedy efficient payments and identifying which customers are the slowest. That way, it can start thinking about late payment penalties, better cash terms (e.g. 30 days rather than 60-90 day payment) and maybe even looking for alternative customers.
4 Consider using a broker
If your company is raising business finance, it might be worth speaking to a broker of finance to make sure you find the most appropriate deal and work on your behalf while you run the business.
Trade Finance Global is an expert in its field. And because the company brings a wealth of knowledge and an established network of funders to the table, TDG can scour the market (saving you what we think of as a full time job), and negotiate on your behalf.
5 Hedge your currency
As a result of Brexit, foreign exchange rates have been the most volatile for many years, with Sterling at more or less a 31 year low against the US Dollar, and at a 5 year low against the euro.
Sterling against the US Dollar showing support and resistance lines. Sourced from Thomson Reuters
This has however created great opportunities for UK exporters. With purchasers being able to buy goods at more competitive prices, initial UK export data has been compelling.
Mark Runiewicz of Trade and Export Finance Ltd believes that SMEs should look to build a strong order book and not decline creditworthy business, as there are a lot of opportunities to obtain funding to support SME’s.
By planning meticulously and staying close to the detail, understanding charges and knowing your customer, you will avoid running into working capital and cash flow difficulties in the medium to long term while you’re building your small company into a sustainable larger enterprise.
