finance for business growth -...

BUSINESS WITH CONFIDENCE icaew.com

Finance for Business Growth

A Presentation by Clive Lewis,

Head of Enterprise,

Institute of Chartered Accountants in England & Wales (ICAEW)


© ICAEW 2012

Finance for Growth Businesses

Presentation will cover:

• Do you need finance or better financial management? (slide 3)

• Key questions before raising finance (slide 4)

• Conventional finance – alternatives (slides 5 – 9)

• Newer sources of finance – banks (slide 10)

• On-line sources of finance (slides 11- 22)

• Bank’s Appeals Process (slides 23 - 24)

• British Business Bank (slide 25)

• How an accountant can help you access finance (slide 26)

• ICAEW Business Advice Service (slides 27 to 29)


© ICAEW 2012

Do you need finance or better financial management?

• A business should have a continuous focus on cash flow

• Good practices and clear lines of responsibility are important.

• Have clear credit agreements with customers and suppliers

• Have a system for following up late receipts from customers

• Knowing your current bank balance and how you expect it to

change over next 3 months is vital

• Good financial management not only helps manage cash it will

reassure finance providers

• A growing business can mean increased finance

requirements. Plan and control your finances to meet any

increased need.


© ICAEW 2012

Getting the appropriate finance for your

business

Some key questions to consider before seeking finance:

• How much are you looking to raise?

• Are monies needed for short or long term needs?

• Are monies needed for growth or just to sustain your

business?

• Are you prepared to offer security over a business or personal

asset or guarantees?

• How would you repay a loan?

• Are you prepared to bring in an outside investor and give up

either a minority or majority stake?


© ICAEW 2012

Equity Finance

• Shares or equity are issued to owners of a business. The

investor wants a steady stream of dividends and capital

appreciation i.e. there is no expectation of repayment as with

debt finance. In public companies the shares will usually be

traded on a recognised stock exchange and so can be sold at

any time. In private companies there is no obvious market and

shares must often be offered to other shareholders before any

sale to outsiders.

• Growth business require equity finance for expenditure such

as research and development or significant marketing

expenditure. Alternatively you may wish to acquire another

business. In these cases raising equity finance may be a

solution.


© ICAEW 2012

Debt Finance - security

• A loan will often be accompanied by one of three forms of security - a

personal guarantee, a charge across all a company’s assets (an all

asset security agreement/a debenture), or a security on a specific

asset (asset backed security).

• A personal guarantee is an agreement between an individual and a

lender whereby the individual agrees to be responsible for assuming

the debts of another person or a business.

• Business owners or a director of a limited company will want to

borrow money in your own name to support the cash flow of the

company. If the business runs into financial trouble you will be

required to cover any losses of the lender. Consequently your

personal assets will be at risk.


© ICAEW 2012

Getting the appropriate finance for your business

Bank and Invoice Finance

Loans - Normally secured by a charge over asset(s). Often has

conditions attaching to the loan (“covenants”) which can trigger a

demand for immediate repayment if they are not met.

Overdraft -The lender offers a facility with a limit with an agreed

interest rate and probably secured. The business can dip in and out of

the facility up to the limit.

Debt Factoring – To consider factoring the business needs debtors

with a good credit record. The factoring company pays a percentage of

the debtor book immediately to your business. Factor chases debt

Invoice Discounting allows the business to administer the sales

ledger and the customer is unaware that the debt has been discounted.


© ICAEW 2012


Other Asset Finance

Outright Purchase or Deferred Payment -asset(s) can either be

purchased outright or paid for by instalments. There are various

types of deferred payment - hire, hire purchase or leasing.

Mortgage – normally be used to finance a property acquisition or to

expand an existing business premises. Similar to a bank loan with the

mortgage usually being secured over the premises. Loan to value

ratios vary but unlikely to exceed 70%


© ICAEW 2012


Equity Finance

Self funding, friends and family - A business owner with their own funds or

those of friends and family, inject monies into the business. This can be by way

of a loan or equity finance. Must put agreement in writing

Small Scale Equity Finance - businesses sell a share in the business to friends,

family, business angels or other private investors. They must be prepared to

allow others a say in how the business is run. Business angels bring (up to £2

million) finance to a business and they normally have experience in what makes

a successful business

Venture Capital - Invest in businesses with potential for high growth based on

proven track record. A detailed business plan is essential. Will want a clear

strategy for achieving growth.

Tax relief – Enterprise Investment Scheme (EIS), Seed Enterprise Investment

Scheme (SEIS) and Venture Capital Trust Scheme (VCT) offer tax reliefs for

investment in unlisted growth companies


© ICAEW 2012

Newer sources of finance

Newer Banks – some examples

Handelesbanken specialise in providing personalised and bespoke

banking services to both corporate and individual customers. Decisions

about your banking are made by your local

branch.www.handelsbanken.co.uk

Metro Bank offers business overdrafts, loans and credit cards. Longer

opening hours than high street

banks.www.metrobankonline.co.uk/commercial

Shawbrook Bank - all lending is done through independent brokers/

strategic partners. www.shawbrook.co.uk

Aldermore – lends to SMEs through asset finance, business

mortgages and invoice finance. www.aldermore.co.uk

For further information do a web search


© ICAEW 2012

Newer online sources of finance:

• Debt funding

• Equity finance

• Working capital funding – factoring & invoice discounting

Seeking to match businesses looking for finance with individuals

and businesses looking for diversification of risk and yield.

Business models vary. Vital to understand how risk of

proposition has been assessed.

Cost proportionately higher than bank finance but risk often

greater.

Internet Finance not within the Financial Services Compensation

Scheme


© ICAEW 2012

Debt Funding (or Peer to Peer Lending) through the

Internet

• Applicants fill in on-line application form

• Acceptance criteria vary but for Funding Circle will include the

following:

– Must be UK based limited company

– At least two years financial reports

– Making a profit and a good credit rating

– May require up-to-date management accounts

– Details of other loans and commitments

– Responses are usually quick. Funding Circle says it’s credit

assessment team will give an answer on the application in 2 days.


© ICAEW 2012

Peer to Peer Lending – On acceptance

• Once accepted for entry loan applicants enter auction in a marketplace. A

risk rating is applied to guide lenders

• Registered lenders start bidding the amount they are prepared to lend and

the interest rate they expect to be paid

• As bidding intensifies the interest rate tends to drop

• Applicants can accept the loan as soon as it is fully funded . Alternatively the

loan can be kept live for 14 days to see if the rate drops further

• Once loan accepted applicants can expect the money to be in their bank

accounts. This varies from same working day to two weeks

• An arrangement fee – either a percentage of the loan or a fixed amount – is

charged on the loan.

• The applicant repays the loan to the peer-to-peer lender who is responsible

for distributing the repayments to all lenders involved in the loan


© ICAEW 2012

Peer to Peer Lending

Some providers :

• Funding Circle – loans £5,000 to £500,000

www’fundingcircle.com

• Thincats – loans £50,000 to £1M – www.ThinCats.com

• Rebuildingsociety - £2,000 to £50,000 to cos with turnover

over £200,000. www.rebuildingsociety.com

• FundingKnight – loans £25,000 to £100,000 to well

established SMEs. www.Fundingknight.com

• Wonga for business – short-term loans to £30,000

www.wongaforbusiness.com

http://www.wongaforbusiness.com/


© ICAEW 2012

Peer to Peer Lending Vs Bank Finance

Advantages over bank finance:

• Application process is generally quicker

• Generally less onerous security requirements

Disadvantages over bank finance:

• Interest rates generally higher particularly where security and

guarantees not available

• Arrangement fees higher

For lenders:

• P2P in early stages so bad debt levels low.

• Bad debts not tax deductible for lenders

• But some P2P lenders have central fund to help mitigate bad debts


© ICAEW 2012

Equity finance (Or Crowd Funding) through the Internet

Businesses seeking equity must:

• Complete a questionnaire specifying how much finance

required and the equity on offer

• The disclosures are reviewed to ensure they are fair, clear and

not misleading. Listing is then approved

• If full amount offered within a specified period, go to closing, if

not, investors get money back

• In closing legal due diligence is conducted and business signs

documentation and on-line platform subscribes for shares on

behalf of investors


© ICAEW 2012

Crowd Funding Continued

• Fee for obtaining finance paid at this point

• Post-investment online platform holds shares as nominees for

investors.

• Dividends or when business floats or sells out the on-line

platform passes the proceeds back to investors

Some on-line equity funding:

• Crowdcube – www. Crowdcube.com Raised £11m for 60+cos

with 42,000 registered investors

• Seedrs – invests in seed-stage start-ups seeking up to

£100,000 of equity- www.seedrs.com


© ICAEW 2012

Other Points on Crowd Funding

• Tax breaks such as Seed Enterprise Investment Scheme

(SEIS) can make Crowd funding more attractive

• Issues with second round funding with so many first time

shareholders.

• Research indicates that around 50% to 70% of business start-

ups fail completely. Investors advised to spread investment to

diversify risk.

• FCA intention is to restrict financial promotions for unlisted

shares or debt securities to sophisticated investors, high net

worth individuals, investors taking authorised advice and to

limit investment in this class to 10% of net investible portfolio


© ICAEW 2012

Working capital through the Internet

Lending usually based on factoring and invoice discounting or

selling future credit card income

Factors & invoice discounters include

• Marketinvoice – www.marketinvoice.com

• Platform Black – www.platformblack.com

• Receivables Exchange – www.receivablesxchange.com


© ICAEW 2012

Working capital through the Internet

Credit card companies include Boost

- Business supplies evidence of recent card turnover

- Boost makes an offer of a cash advance based on turnover

- Boost agree to by future credit/ debit card receivables at a discount

- Daily repayment made via small fixed percentage of future credit/

debit card sales

- Business advises card processor to send settlement funds to escrow

account

- Funds collected and remitted through a proprietary escrow service

using Barclays AMS client account

www.boostcapital.co.uk


© ICAEW 2012

E-Invoicing, debtor management & arranging

finance

Various packages available. Following is Bilbus

• Create a sales invoice or upload from a template

• Invoices can be electronically submitted to customers in a

number of ways including by email direct from your accounting

platform or integrating with accounting platform and sending

direct to customer portal

• Platform sends automated reminders to customers

• Customer updates to status of invoice in their system can

result in automatic update of your collections forecast

• Platform provides feedback on customers’ payment

performance and cost of outstanding debt

• Platform can be linked to an application to a finance provider


© ICAEW 2012

Recent Developments in Internet Finance

• The Financial Conduct Authority (FCA) assumed responsibility

for regulation of the sector on 1 April 2014.

• It has focussed on establishing standards for credit checking

procedures and minimum capital requirements

• Concern that too strict standards will push up costs making

conventional forms of finance more attractive.


© ICAEW 2012

Getting the best from your bank

If refused credit by a bank

• Get a written explanation for the decision

• Consider requesting an appeal – 40% of appeals result in the

decision being overturned frequently because business

provides additional information.

• Bank should offer suggested alternative sources/types of

finance

• Review banks feedback and consider applying to another

bank or source of finance

• Ask is equity finance the way forward?


© ICAEW 2012

Getting the best from your bank

• All major UK banks have agreed a set of principles if your formal

application for finance has been refused and you appeal the decision

• An independent and external team of reviewers monitor the

principles and the banks application of them

• The appeal is reviewed by a second person from the bank not

involved in the original decision

• The reviewers have 30 days to communicate the result of your

appeal to you.

• 40% of appeals reviewed in the first year resulted in the original

refusal being overturned. In a majority of these cases this followed

additional information being submitted.

• For more information ask your bank or look on the Better Business

Finance Website – www.betterbusinessfinance.co.uk


© ICAEW 2012

British Business Bank

• The British Business Bank now operates as a Government-

owned financial institution

• It will control £4 billion of government finance schemes and

expects to leverage £10 billion of SME access to finance..

• Working with 70 partners, it uses its funds to unlock finance for

thousands of smaller UK businesses It operates where a

market failure can be demonstrated either on commercial

terms or on subsidised, non-market terms

• http://british-business-bank.co.uk/applying-for-finance/


© ICAEW 2012

Getting finance – how might an accountant help?

Many accountants offer advice on business finance. An adviser

can help with:

• Reviewing the business to identify its financing status and

needs

• Identifying the most appropriate sources of money

• Guidance on investor expectations and attitudes

• Preparation of the business plan and assisting

with presentations to finance providers

• Support through the funding and due diligence process

They will make a charge for the work – ask for a quote before

you ask them to help.


© ICAEW 2012

ICAEW Business Advice Service

• BAS offers an initial consultation for businesses and start-ups with

an ICAEW Chartered Accountant free of charge.

• An opportunity to discuss your business issues with a finance

professional

• Discussion can cover business issues from record-keeping to

managing cashflow


© ICAEW 2012

ICAEW Business Advice Service

Go to:

businessadviceservice.com

Or email:

[email protected]

To find BAS firms in your area.

A world leader

of the accountancy

and finance profession


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