At MacManus Asset Finance we are approached to assist with securing finance from all manner of businesses. From sole traders and partnership through to limited companies and PLCs.
One of our constant challenges, however, is securing finance for new start businesses.
I would love to tell you that new start finance is a simple process and we have a 100% success rate, however that would be a lie.
Securing finance for new start business is difficult, but not impossible.
Firstly it would help if we define what is a new start business, as, believe it or not even some finance companies don't understand it.
Our definition of a new start business is:
"Either a sole trader, partnership or limited company in which the primary individuals in operation or control of the enterprise are commencing trading in this industry for the first time in the UK, regardless as to whether or not they have had experience in this industry as an employee."
Believe it or not some finance provider consider a newly formed limited company, to be a new start business, even though it may have traded for years as a sole trader or partnership business and simply incorporated for tax efficiencies.
It is important to know this as many finance providers process applications on an automated credit scoring system, which means that when the new limited company is entered on to the underwriting system it will automatically default to decline as without human intervention their isn't the ability to recognise that the business has merely changed legal form, and is not a new start in the defined sense.
This erroneous interpretation of what constitutes a new start business really can effect a businesses ability to secure competitive finance.
Recently we assisted a bus and coach company that had traded for 30 years as a sole trader and had recently incorporated as a limited company.
As expected when we proposed the application the initial response was to decline it, however we were able to demonstrate to the finance house that the business had a long and established track record and as a result the decline was overturned and we secured very competitive rates. Now the client was delighted as they had attempted and failed to get finance when they had approached finance houses themselves prior to our involvement. The difference was of course our access to the underwriters and ability to properly explain the proposal.
So, now we know what constitutes a new start business, the next question is what do we need to do to secure finance.
This comes back to two crucial factors that all lending is fundamentally based on - Security and Serviceability.
Security - if it all goes wrong how sure can the funder be that they will get their money back. Oh, and they want their money back (remember this!)
Serviceability - where is the cash to maintain the monthly payments.
For all the business planning, and Directors CV's and letters of intent, fundamentally it boils down to these two questions. Satisfy these and you will get your funding.
For a genuine new start business the offered security will primarily be in the asset being funded, and this may or may not be attractive to the finance company.
Two extreme examples could be, a new £30,000 car, where the client wants to borrow just £15,000, therefore providing a 50% deposit. With everything else being equal this is a very good level of security with the finance company confident that should they ever need to repossess the vehicle they should be able to sell it for more than the finance outstanding. Not only is the deposit very large but also there is a large ready second hand market to purchase the asset.
By contrast, a new beauty salon requiring £30K for specialised beauty treatment equipment, and offering £1000 as deposit will stand very little chance of being approved, assuming that is the only security offered. The equipment is very specialised and a funder would consider it has a relatively limited second hand market if it were to be repossessed. In cases like this a funder would consider the asset to have zero value so would need to be convinced of alternative security that would provide them with comfort.
So if the asset doesn't provide security, what else is there?
There are only two other options - a personal guarantee, or security over other assets (equipment or residential property).
A personal guarantee would be a requirement for any new start business. Frankly if you are not prepared to offer a personal guarantee as a new start business don't bother applying.
On its own though it can provide only limited comfort. The guarantee of a multi-millionaire personally backing his new venture would probably be good enough, however a guarantee of a tenant, or someone with little or no property equity doesn't provide much security.
Where the PG is limited then a funder may ask for a second charge over a residential property, normally the director’s main home residence. If there is sufficient property equity for the funder to get comfortable then this may be a way of proceeding and unlocking the finance.
Of the two Security is the most important. Satisfy this and then we need to demonstrate Serviceability.
This is where the business planning can really pay off.
A new start company that has a written contract with a major PLC to carry out work for the next 5 years, with guaranteed income sufficient to prove the finance payments can be comfortably met is a hugely persuasive argument to secure finance.
We would need copies of the contracts of course but a funder can take great comfort if it can see that cash flow is guaranteed by way of a contract from a reputable business.
The contrast example is a business where its being started very much "on a wing and a prayer", no cash, no ability to prove that any money will be generated.
A "promise" of work is nice, and we see this a lot, but having a contract in place will transform an application. These proposals, without it, will need to strengthen the security offered, via larger deposit, or other security, in order to secure the finance.