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Financing For Small Business Operations – Franchise Loans
It can tough to run your own business, even just a small one. With all the different things you need to pay attention to, the whole task of operating your own business can easily become quite cumbersome. But there are several ways to lessen the workload – other than from having business partners. One way is through selecting a franchise business so you will not have to worry much about developing a business plan from scratch. However, the truth remains that financing for small business operations, even a franchise, can still be tricky. So is there a way to make your life as a business person a lot easier?
Most people these days prefer to run a business through a franchise so they can already have most of the significant elements of the business well set up. However, having your own franchise will require you to pay an upfront fee. Aside from this, you will also need to have enough capital to fund marketing costs, as well as build-out costs. And in this case, it can help to learn more about different forms of financing for small business operations. More often than not, franchisees will find themselves looking for ways to qualify for franchise loans.
The good news is it is a lot easier to finance a franchise than acquiring funding for start up businesses. This is because most franchises have already established a good track record, including the finances. It is also possible for franchisors to supply financing to business owners who are planning to buy a franchise. The type of financing can differ from one franchisor to another and the amount can also vary between franchisors. There are also financial firms that offer small business funding and franchise loans using retirement funds. This is possible through developing a financial structure that can enable franchisees to invest their retirement funds directly into their own franchise without having to take a taxable distribution.
The Small Business Administration can also provide franchisees with different kinds of funding. All it takes is for us to learn more about these different ways to increase capital for our franchise.
There are several ways for us to increase the amount of capital we have for our new franchise. What is important is for us to keep a close eye on our finances so we can better determine if they are indeed being spent or invested wisely.
Choose Your Sources of Working Capital Finance for Business Credit
You have choices in sources of working capital finance and in business credit solutions.
It is all about understanding the problem and knowing where to go for the solution, so let’s look at those two key issues. Understanding the problem is not something you have to read about, as a business owner and financial manager in Canada you live the capital ‘crunch’ or ‘challenge’ every day.
Working capital is best understood as your operating capital, and you have investments in receivables, inventory, that’s where your investment currently lies, and your goal is to monetize those assets in the best manner possible.
The textbook definition doesn’t really help us out – our accountants and analysts tell us to go to the balance sheet, subtract current liabilities from current assets, and, voila! That’s working capital!
One of the biggest contradictions that you need to understand is the issues of assets, profit, liquidity and turnover. Once you have a handle of those the concept of working capital and, more importantly, the solutions start making more sense.
We hate those textbook definitions we referred to, but we will agree that the calculation we shared needs to be positive – you do need more inventory and receivables combined as measured against payables and other short term liabilities. How you manage those short term assets of A/R and inventory is the challenge.
Many business owners quickly realize that one of their liabilities, i.e. payables, is actually a large asset in measuring capital and managing it. That is because if you can continue to convert inventory into A/R into cash, and slow down payables you are achieving working capital progress.
Is there a perfect way to measure your working capital needs and progress? One of those methods is to check into the ‘cash conversion cycle ‘- It’s a tool you can use to measure how low a dollar takes to flow through your company. It simply takes your inventory and receivable days outstanding, subtracts your payables days outstanding, and there is your final number. It’s a great long tool to understand your progress over long periods of time.
In order to achieve solid cash flow you need to increase turnover – that can be done by accelerating cash flow by borrowing against receivables, or selling receivables via a factoring process.
Your working capital solutions in Canada are limited, but they are very focused and real. Your can increase cash flow today with no ones assistance simply by accelerating turnover of your assets such as receivables and inventory. If you feel your challenge is more of a long term nature a term loan (if larger these loans are called subordinated debt) is the solution.
You can also generate unlimited capital by entering into an asset based lending or facility with a non bank finance firm. Don’t forget that term loans for working capital add debt and obligations to your balance sheet, so we often suggest to clients that the best solution is in fact monetizing your assets, not borrowing more – that where asset based lines of credit work best.
So whats it all about – it’s a case of understanding what it is, looking at how your firm performs in key metric areas of turnover, etc, and then choosing a solution that works best for your firm, whether that is long term in nature, or a bulge type facility that augments your daily cash needs. Speak to a trusted, credible and experience working capital business financing advisor to determine what choice is best for your firm.
Business Finance – Top 5 Ways to Finance Your New Company
When thinking about carrying out a company formation and running a new business in the UK, your main worry may well be finance. Every business necessarily needs money to get off the ground and to keep running into the foreseeable. A great deal of businesses fail in the first year. So it can be a scary thought, taking the risk. However, the benefits often outweigh the risks and many other businesses before you have managed it, so why can’t you? Luckily, the government is keen to help small business thrive. They are offering a number of grants, tax reliefs and other sources of help to support new companies and their continued growth. These aren’t the only options. There are a number of financing options available to those entrepreneurs who need them. Which is suitable for you will depend on both your circumstances and your intention. Every business is different.
Below is a list of the top 5 popular ways to finance a new business. It’s not necessarily definitive, but we hope you will find it useful.
1. Raiding the savings
Many new companies start this way. Using savings, borrowing from family members or maxing out personal credit cards as a way to kick start a business venture. It can be a risky undertaking, but may pay off in the long term.
2. Bank Loans
Using a bank loan is probably the second most common approach adopted by new companies. With a suitably prepared business plan and sufficient security a company may be able to acquire a substantial loan from the high street banks. The downside is the interest rates a company will be likely to pay and the length of repayment, meaning a long term cash flow burden on a growing company.
3. Grants
A number of grants are available for new companies, from a variety of sources. Local authority, European Union and general government. They are usually granted for specific criteria for the advancement of business which the authority deems to be in their interest. As such, grants are often harder to obtain than other sorts of finance, but are preferable due to their nature. Grants for things like Research and Development can be found via the Solutions for Business scheme provided by central government. A number of finance “products” are available under this scheme, including the Enterprise Finance Guarantee which offers help to those businesses seeking loans that might not otherwise be able to acquire them. Advice on these financing options can be found using your local Business Link office.
4. Factoring
Certain businesses may be able to take advantage of this finance method. Factoring is quite simply a transaction under which a company sells invoices to another business in order to acquire funding quickly. Usually the invoices are sold at a discount to the other business who then recovers the debt. It necessarily means that the business makes a loss, but also allows swift finance which can be used in the short term to cover debts or finance new projects. In some industries this is a very common occurrence and perfectly normal practice.
5. Business Angels/Venture Capitalists
These are wealthy individuals who are specifically looking to invest in new companies and fresh ideas. They may be able to invest large amounts of money in the right project but in turn will likely want a share of the business or some level of input into how it is run/managed. This can be off putting for some new business owners who want to run it their own way, but at the same time, the experience and knowledge may be of great benefit to a new company in the early stages of growth.
If you have a good business plan and know where you are going to get your finance from, why not kick start your new company today by carrying out a low-cost, professional company formation with the UK’s leading company formation agent? We’re keen to give support and guidance to new businesses, helping them the thrive and grow. Running a new tax, efficient company has never been easier.
Different Types of Funding
Finance for business can be obtained through a number of different sources.
Let’s review some of those channels to help you decide what’s right for your business needs:
Grants
There are over 930 different EU and UK grants and loans available from over 100 issuing bodies. This is the cheapest form of finance and an important part of the funding package that companies and individuals need. We can help you find your way through this maze.
Technology
Micro Projects: 50% of eligible costs up to ?20,000 Research project: For a technical and feasibility study of an innovative idea for new technology 60% of costs up to a grant of ?75,000. Development project: For development up to pre production 35% of costs up to a grant of ?200,000 Developing an innovative idea: valuable for small companies and individuals at the start of a technical project: 75% of costs of hiring a mentor and consultants.
Export
To start exporting or moving into new markets grants of 50% of costs up to ?20,000 each.
Training and Education
Knowledge Transfer Partnerships, Achieving Best Practice in Your Business, Investors in People
Modern Apprenticeships
New Deal for various grants.
Environment
BOC Foundation for the Environment: 25% to 50% of Project cost, typically ?20,000 to ?100,000
Clean up Fund: Emission reducing equipment up to 75% of cost
Community Chest Fund: Up to ?25,000 for projects near active SITA sites
High Impact Fund: ?150,000+ for larger projects near SITA sites
Assisted Areas
Regional assistance grants of between 10 and 35% for capital expenditure in less favoured areas of the UK.
Loans
Loans are an excellent source of finance if you have suitable security to borrow against or a reliable earnings stream. This needs to be planned and presented well to obtain funds.
Credit cards
Provides up to 56 days free credit if you play the game!
Overdraft
Banks are surprisingly supportive when presented with a well thought through plan and competent management.
Bank Loans
Lenders tend to look for a good business plan and security. Typically the loan is approved by a centralised back office function rather than the person you meet. Terms and rates depend upon the risk. Repayments can be very flexible to meet your specific needs.
Mortgages
These can include flexible repayment terms to meet your business needs. This can even be incorporated into your overdraft finance so that you have one flexible account for both personal/ business mortgages and overdraft
Small Firms Loan Guarantee Scheme
Up to two years trading: Up to ?100,000
Over two years trading: Up to ?250,000
However these are difficult to obtain and are a loan of last resort.
Export Guarantee Scheme
This is government backed insurance against appropriate export documentation.
Mezzanine
This is a halfway house between loan and equity. It can be an innovative way of raising funds for the more established business. Mostly for expansion capital.
Equity
This is not as easy as the papers would have you know. Only 1% of business plans received by Venture Capital Funds are successful. However, a good business proposition consisting of a strong demand for the product or service, management track record and a sound financial plan will enhance the chance of success.
Business Angels
These are high net worth individuals who are successful businessmen looking for investment opportunities. They can provide both time expertise and money. Typical investment size is ?25,000 to ?250,000 but can go as high as ?2m for the right opportunity. Exit within 3-5 years.
Venture Capital
These are investment funds seeking high rates of return. However typically investments are over a million pounds. Some funds are targeted at lower amounts depending upon the sector and region. These funds are looking for exponential capital growth over 3-5 years.
Asset backed finance
This can cover machinery, sales invoices even sales orders. It can be a very flexible source of finance to the growing business
Leasing
This will cover your capital expenditure and spread the cost over a three to five year period. It is particularly useful if you do not have taxable profits to maximise your capital allowances.
Sale and leaseback of a property you own is another good source of funds.
Factoring
Factoring offers a sales ledger administration and debt collection service. Up to 95% of an approved sales invoice is paid within 48 hours, quicker if required. Credit protection is also available to protect against a bad debt. The Factor will own and place a first charge over the book debts and they might also take other charges, depending upon the strength of the financial information.
Invoice discounting
Invoice Discounting can be Confidential or Disclosed; it depends upon the strength of the financial information. The service is the same as Factoring, except that the sales ledger administration and the debt collection is the responsibility of the client and not the Factor. Pre payment of the approved sales invoice is still up to 95% and the factor will still have a first charge on the book debt and therefore own the debt. This service can also have credit protection cover. All sales invoices need to be for a business to business debt, and some proof of delivery is generally required.
Trade Finance
This is funding provided against stock purchases, signed contracts and orders whereby the funder will prepay a certain percentage of the value
Pension fund
It may be possible to use your pension funds for a loan back to the business
Business Relationship Funding
This is another source of funds that can be overlooked. It may be possible to introduce potential alliances to add value to both parties. It may produce an ultimate exit route in the medium to long term.
Joint Ventures: Requires a legal agreement embodying the deal and another company Partnerships: Two companies collaborate with possible funding. Joint working relationships: These are an informal partnership which may be more project specific where the parties can share resources. Agencies: These can be geographical or product specific and generally incorporates a payment for the right to the agency. Distributors: Very like an agency but may not necessarily involve up front payment. Alliances: These do not require a separate company and can be embodied by a legal agreement to work together. Trade investors: Otherwise known as Corporate Partnering. This can be a good way to involve a much larger company in the business with a view to possible trade sale further down the line. Associates: This can be a loose arrangement with no fundamental commitments either way, rather like a preferred supplier. Equity Swop: Two companies exchange shares to a similar value to develop both businesses. Franchises: This can allow the business to grow without further direct investment. Licensing: This involves licensing a product or service to enable others to sell it. This requires you to own the intellectual property.