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New Concerns about funding

As the British economy tightens owner-managers and directors of companies in the SME sector are naturally becoming more concerned about ongoing funding for their businesses. Those running a successful and expanding business are equally concerned about financing their growth.

Margins are reducing, while the amount of time it is taking to collect cash is increasing, resulting in reduced cashflow for all but the wealthiest of organisations.

There are a number of options available to most businesses, but when all are examined only one is demonstrating a meaningful contribution for profitable businesses seeking the most appropriate funding available.

Let's dismiss the worst options first: asking friends or family for an injection of cash, whether it be a gift or a loan. At best this option is limited, and at worst it could be a life-changing mistake. Many owner-managers have naturally experienced apprehension when forced to use their home as security for funding, but at least it is their own business that is benefiting. Imagine the mental anguish of a relation handing over hard-earned cash to a business over which they have little or no control. It is a recipe for family disaster, I suggest.

Human nature also plays a key role in the second option: the introduction of venture capital. The use of venture capitalists is increasing because they are awash with cash, immediately available in the right circumstances. But they are in business too, and they will want their share of the company you have created to justify their investment in your future.

As an owner-manager you must ask yourself how much you will resent giving up a shareholding to an organisation whose only contribution has been to put itself in a position to take advantage of your needs.

Furthermore, venture capital investment is usually fraught with restrictions and often divisive conditions. Banks are worse ­ in fact it is surprising that so many British companies see them as their first, and only, source of cash, given their growing reputation for being impersonal, inflexible, and providing an umbrella only when the sun is shining rather than when the rain is pouring down.

Too many companies have seen overdraft facilities withdrawn on the whim of a remote decision-maker within this changeable beast who has taken a dislike to a section of industry, or an element of the economy. This is the kernel of the problem with banks ­ and their overdraft facilities. They can fluctuate as often as the weather. And this is despite the fact that you and your business will have been heavily scrutinised and given securities and guarantees before the overdraft has been granted in the first place.

Should you need funds from a clearing bank I suggest you opt for a loan which cannot be recalled or rescinded as easily as an overdraft and won't put your assets at risk as long as you continue to trade profitable and repay the loan at the pre-determined rates.

So what are we left with ? What is the option with the least drawbacks (nothing in the world is perfect !). The answer is invoice finance in the form of either full factoring or invoice discounting, and preferably with an independent rather than the invoice discounting operator associated with a major clearing bank.

Such independent financiers are able to create a business partnership, bringing an understanding of the needs of the SME sector - and it will not be asking for you to risk your personal assets, or those of your family.

Because factoring and invoice discounting revolves around the advancing of cash against sales made by the company, all production costs and overheads have already been met, resulting in the company's capital being tied up in the debtor book. So the more the company expands the more invoices it issues, and the greater the cashflow it receives.

On top of straightforward 80% payments of sales invoices, independents such as Close Invoice Finance have the flexibility to offer funding in certain cases against stock, placed orders, and even purchase orders. We will often fund against just one invoice in some circumstances.

Invoice finance is therefore the most appropriate funding for growing companies and those requiring an assured cashflow to cope with today's economy. Independents in the sector will support their clients through the bad times as well as the good because they will have taken the trouble to understand your company and your industry. Experienced, committed funders who can advise and assist, as well as advance cash as businesses evolve and cope with change.

It could be said that funding a company is akin to undertaking a long, tortuous car journey. Nobody would contemplate crossing the Sahara on a gallon of petrol ­ they would ensure there was enough fuel for their needs to get from 'A' to 'B'. Factoring and invoice discounting is the fuel of today's business ­ it never dries up as long as the company is making sales.


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