There are lots of sayings around planning and what lack of it causes, and this couldn’t be more true in business. Forward planning not only provides more time for decisions to be made at a leisurely pace, but more importantly if done properly can save you and your business money. All too often we see clients looking at purchases in isolation rather than part of their overall business and financial plan. With so many different types of finance available to businesses, it can be a bit of a minefield to determine the right product for a particular scenario. So what should be considered before making a decision?
The most appropriate product/facility will depend on a number of factors but as a general rule of thumb, the more security there is the lower the cost of finance.
Secured finance – mortgages & asset finance
One of the cheapest forms of finance is a mortgage, as property is taken by way of security and the risk to the lender is deemed relatively low.
Similarly, with asset finance the security is generally just on the asset, which means that pricing is somewhat dictated by what the asset is. Assets such as vehicles, plant and machinery are easy to sell on the open market, which means there is more security and as such the rates are relatively low. Less secure assets such as IT solutions and office equipment attract higher rates, but is often still a far more cost effective option than entirely unsecured funding.
Unsecured finance – loans
Unsecured loans are one of the most expensive types of finance, and should ideally be a last resort. As there is no asset to secure the lend against, this is the riskiest type of lending, which comes rates to match the high risk. Even with unsecured loans, personal guarantees will be required to facilitate a lend.
We would only suggest using an unsecured loan, where there is no other option.
The finance purpose also plays a large part in dictating the rates that will be available to you. A reason for finance that will always attract higher rates is capital raising for example if you want to raise funds to pay your suppliers or staff – anything that constitutes a working capital requirement. This is because these should be the priority of a business and not having the funds to pay these suggests an element of business distress.
We had an example of this recently, where a client approached us for a loan to facilitate some short-term working capital requirements, but they had paid cash for a vehicle just a couple of months previously. If the client had funded the vehicle at point of purchase, they would have been taking advantage of one of the cheapest forms of finance, but instead the only option available to them would have been a high rate, unsecured loan.
There are specific products available to help ease the strain on cashflow when waiting on payments from your clients, such as invoice finance. As the security in this type of finance is your debtor book, this is relatively expensive in comparison to asset finance or mortgages but finance if used properly this can enable you to grow your business.
The way a finance requirement is presented and structured is also critical in saving both time and money. As an asset finance expert, Focus are able to really gain an understanding of your requirement to maximise the approvals that can be obtained on asset finance, rather than having to opt for a higher cost option, such as a loan. A really good example of this is fit-out of a new premises, where there are a lot of reasonably intangible costs, you may write this off as an option for asset finance, paying much higher rates for an unsecured loan. We have access to funders who understand the make up of a fit-out and are able to facilitate approvals for the full project.
By having conversations around the plans for your entire financial year, with both your accountant and a good finance broker, you will ensure that you optimise the rates available to you. It is really important that you work with a finance partner you can trust to get the right deal for your overarching requirements, not necessarily the cheapest deal at that moment in time.
