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Who can apply for a venture capital scheme?

kmcgowan — Thu, 18 Jul 2024 13:24:07 +0000

Who can apply for a venture capital scheme? kmcgowan Thu, 18/07/2024 - 14:24

Using a venture capital scheme to raise money

In this guide:

Qualifying for a venture capital scheme

There are qualifying conditions for each venture capital scheme and limits on the money raised.

Any advance assurance given to a company using the Venture Capital Trust (VCT), the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) is only in respect of certain conditions of the venture capital schemes being met.

This is based on the information provided by the company.

It should not be read as a more general endorsement or as an indication of potential investment performance. Investors are recommended to consider conducting their own due diligence before making any investment.

See types of venture capital schemes.

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Who can apply for a venture capital scheme?

Eligibility criteria businesses must meet to qualify for a venture capital scheme.
Your company must:

have a permanent establishment in the UK

carry out a trade that qualifies

plan to spend the investment on a qualifying trade

not be listed on a recognised stock exchange at the time of investment

not be controlled by another company

You must also meet the specific qualifying conditions of whichever scheme you opt for.

Qualifying trades

You must use the investment for a qualifying trade.

Most trades will qualify, including any research and development which will lead to a qualifying trade.

However your company may not qualify if more than 20% of your trade includes things like:

coal or steel production

farming or market gardening

leasing activities

legal or financial services

property development

running a hotel

running a nursing home

generation of energy, such as electricity and heat

production of gas or other fuel

exporting electricity

banking, insurance, debt or financing services

Find a full list of, and more information about non-qualifying trades in the HMRC manual.

Limits on the money you raise

There’s no minimum, but there’s a maximum amount you can raise depending on which scheme you opt for.

The maximum amount you can raise in the lifetime of your company for:

Seed Enterprise Investment Scheme (SEIS) investments is £250,000

Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) investments is £12 million

There may be higher limits if your company carries out research, development or innovation and meets certain conditions.
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Types of venture capital schemes

Each of the three types of venture capital schemes have their own criteria for businesses to qualify.
There are three different types of venture capital schemes and each scheme has its own qualifying criteria.

The Enterprise Investment Scheme (EIS)

Your company (or group of companies if you’re a parent company) may qualify if at the time of investment, it has:

no more than £15 million in gross assets

less than 250 employees

been no more than seven years since its first commercial sale

There may be higher limits if your company carries out research, development or innovation and meets certain conditions.

Find out more about the Enterprise Investment Scheme.

The Seed Enterprise Investment Scheme (SEIS)

Your company (or group of companies if you’re a parent company) may qualify if it is less than two years old, and at the time of investment has:

no more than £350,000 in gross assets

less than 25 employees

not previously carried out a different trade

You will not qualify if you’ve already had investment through the Enterprise Investment Scheme or a Venture Capital Trust.

Find out more about Seed Enterprise Investment Scheme.

Venture Capital Trust (VCT)

A VCT is a company that has been approved by HMRC and invests in, or lends money to, unlisted companies.

A VCT may invest in your company if it has:

no more than £15 million in gross assets

less than 250 employees

not been more than seven years since its first commercial sale

There may be higher limits if your company carries out research, development or innovation and meets certain conditions.

Find out more about Venture Capital Trusts in the HMRC manual.

Social Investment Tax Relief (SITR)

Tax reliefs under the SITR scheme are not available for new investments made on or after 6 April 2023.
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Types of venture capital schemes

kmcgowan — Thu, 18 Jul 2024 13:08:12 +0000

Types of venture capital schemes kmcgowan Thu, 18/07/2024 - 14:08

Using a venture capital scheme to raise money

In this guide:

Qualifying for a venture capital scheme

There are qualifying conditions for each venture capital scheme and limits on the money raised.

Any advance assurance given to a company using the Venture Capital Trust (VCT), the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) is only in respect of certain conditions of the venture capital schemes being met.

This is based on the information provided by the company.

It should not be read as a more general endorsement or as an indication of potential investment performance. Investors are recommended to consider conducting their own due diligence before making any investment.

See types of venture capital schemes.

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Who can apply for a venture capital scheme?

Eligibility criteria businesses must meet to qualify for a venture capital scheme.
Your company must:

have a permanent establishment in the UK

carry out a trade that qualifies

plan to spend the investment on a qualifying trade

not be listed on a recognised stock exchange at the time of investment

not be controlled by another company

You must also meet the specific qualifying conditions of whichever scheme you opt for.

Qualifying trades

You must use the investment for a qualifying trade.

Most trades will qualify, including any research and development which will lead to a qualifying trade.

However your company may not qualify if more than 20% of your trade includes things like:

coal or steel production

farming or market gardening

leasing activities

legal or financial services

property development

running a hotel

running a nursing home

generation of energy, such as electricity and heat

production of gas or other fuel

exporting electricity

banking, insurance, debt or financing services

Find a full list of, and more information about non-qualifying trades in the HMRC manual.

Limits on the money you raise

There’s no minimum, but there’s a maximum amount you can raise depending on which scheme you opt for.

The maximum amount you can raise in the lifetime of your company for:

Seed Enterprise Investment Scheme (SEIS) investments is £250,000

Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) investments is £12 million

There may be higher limits if your company carries out research, development or innovation and meets certain conditions.
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Types of venture capital schemes

Each of the three types of venture capital schemes have their own criteria for businesses to qualify.
There are three different types of venture capital schemes and each scheme has its own qualifying criteria.

The Enterprise Investment Scheme (EIS)

Your company (or group of companies if you’re a parent company) may qualify if at the time of investment, it has:

no more than £15 million in gross assets

less than 250 employees

been no more than seven years since its first commercial sale

There may be higher limits if your company carries out research, development or innovation and meets certain conditions.

Find out more about the Enterprise Investment Scheme.

The Seed Enterprise Investment Scheme (SEIS)

Your company (or group of companies if you’re a parent company) may qualify if it is less than two years old, and at the time of investment has:

no more than £350,000 in gross assets

less than 25 employees

not previously carried out a different trade

You will not qualify if you’ve already had investment through the Enterprise Investment Scheme or a Venture Capital Trust.

Find out more about Seed Enterprise Investment Scheme.

Venture Capital Trust (VCT)

A VCT is a company that has been approved by HMRC and invests in, or lends money to, unlisted companies.

A VCT may invest in your company if it has:

no more than £15 million in gross assets

less than 250 employees

not been more than seven years since its first commercial sale

There may be higher limits if your company carries out research, development or innovation and meets certain conditions.

Find out more about Venture Capital Trusts in the HMRC manual.

Social Investment Tax Relief (SITR)

Tax reliefs under the SITR scheme are not available for new investments made on or after 6 April 2023.
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Qualifying for a venture capital scheme

kmcgowan — Thu, 18 Jul 2024 12:56:49 +0000

Qualifying for a venture capital scheme kmcgowan Thu, 18/07/2024 - 13:56

Using a venture capital scheme to raise money

In this guide:

Qualifying for a venture capital scheme

There are qualifying conditions for each venture capital scheme and limits on the money raised.

Any advance assurance given to a company using the Venture Capital Trust (VCT), the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) is only in respect of certain conditions of the venture capital schemes being met.

This is based on the information provided by the company.

It should not be read as a more general endorsement or as an indication of potential investment performance. Investors are recommended to consider conducting their own due diligence before making any investment.

See types of venture capital schemes.

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Who can apply for a venture capital scheme?

Eligibility criteria businesses must meet to qualify for a venture capital scheme.
Your company must:

have a permanent establishment in the UK

carry out a trade that qualifies

plan to spend the investment on a qualifying trade

not be listed on a recognised stock exchange at the time of investment

not be controlled by another company

You must also meet the specific qualifying conditions of whichever scheme you opt for.

Qualifying trades

You must use the investment for a qualifying trade.

Most trades will qualify, including any research and development which will lead to a qualifying trade.

However your company may not qualify if more than 20% of your trade includes things like:

coal or steel production

farming or market gardening

leasing activities

legal or financial services

property development

running a hotel

running a nursing home

generation of energy, such as electricity and heat

production of gas or other fuel

exporting electricity

banking, insurance, debt or financing services

Find a full list of, and more information about non-qualifying trades in the HMRC manual.

Limits on the money you raise

There’s no minimum, but there’s a maximum amount you can raise depending on which scheme you opt for.

The maximum amount you can raise in the lifetime of your company for:

Seed Enterprise Investment Scheme (SEIS) investments is £250,000

Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) investments is £12 million

There may be higher limits if your company carries out research, development or innovation and meets certain conditions.
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Types of venture capital schemes

Each of the three types of venture capital schemes have their own criteria for businesses to qualify.
There are three different types of venture capital schemes and each scheme has its own qualifying criteria.

The Enterprise Investment Scheme (EIS)

Your company (or group of companies if you’re a parent company) may qualify if at the time of investment, it has:

no more than £15 million in gross assets

less than 250 employees

been no more than seven years since its first commercial sale

There may be higher limits if your company carries out research, development or innovation and meets certain conditions.

Find out more about the Enterprise Investment Scheme.

The Seed Enterprise Investment Scheme (SEIS)

Your company (or group of companies if you’re a parent company) may qualify if it is less than two years old, and at the time of investment has:

no more than £350,000 in gross assets

less than 25 employees

not previously carried out a different trade

You will not qualify if you’ve already had investment through the Enterprise Investment Scheme or a Venture Capital Trust.

Find out more about Seed Enterprise Investment Scheme.

Venture Capital Trust (VCT)

A VCT is a company that has been approved by HMRC and invests in, or lends money to, unlisted companies.

A VCT may invest in your company if it has:

no more than £15 million in gross assets

less than 250 employees

not been more than seven years since its first commercial sale

There may be higher limits if your company carries out research, development or innovation and meets certain conditions.

Find out more about Venture Capital Trusts in the HMRC manual.

Social Investment Tax Relief (SITR)

Tax reliefs under the SITR scheme are not available for new investments made on or after 6 April 2023.
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Using a venture capital scheme to raise money

kmcgowan — Thu, 18 Jul 2024 12:51:27 +0000

Using a venture capital scheme to raise money kmcgowan Thu, 18/07/2024 - 13:51

Introduction

Advantages and disadvantages of venture capital

kmcgowan — Tue, 06 Feb 2024 17:59:40 +0000

Advantages and disadvantages of venture capital kmcgowan Tue, 06/02/2024 - 17:59

Venture capital

In this guide:

What is private equity and venture capital?

How forms of private equity such as venture capital and business angels are used to invest in private companies.
Private equity (PE) funding is a general term for investments in private businesses - usually financed from a fund set up by big institutional investment companies.

Venture capital (VC) companies draw on private equity funds to invest in new businesses with high growth potential, eg technology start-ups. In exchange, they take part of the business' ownership, making a profit when they sell their stake and exit the company. VC's typically invest in businesses with:

a minimum investment need of around £2 million, though smaller regional VC organisations may invest from £250,000

an ambitious but realistic business plan

a product or service that offers a unique selling point or other competitive advantage

a large earning potential and a high return on investment within a specific timeframe, eg five years

sound management expertise - although VCs tend not to get involved in the day-to-day running of the business, they often help with a business' strategy

Business angel investments are another form of PE investment, where wealthy individuals use their own money to invest in small companies with growth prospects - see business angels.

The BVCA provides further guidance on venture capital.

Types of PE funds

Many PE funds specialise in a geographical area or industrial sector, while a few serve general investment purposes. PE funds usually have an initial lifespan of ten or more years.

There are four main types of PE funds:

Independent funds - the most common form of PE fund. Their capital is supplied by third parties, with no one party holding a majority stake.

Captive funds - have one major shareholder, contributing most of the capital. A captive fund can be a subsidiary of a bank or an insurance company, or an industrial company looking to invest in its own sector.

Semi-captive funds - have a majority shareholder, but also significant minority shareholders. They can be subsidiaries of financial institutions or run as separate companies.

Public sector funds are made up of capital supplied partly or completely by the public sector.

Find out more about private equity.
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Is private equity right for your business?

Assess whether your business could benefit from private equity venture capital investment.
Most companies seeking venture capital (VC) private equity (PE) investment are start-ups, or new businesses offering investors a potentially high return.

Common uses of PE funding include:

launching a new product

exporting goods or services to new markets

recruiting senior employees

selling part or all of a business

taking over another business

How entrepreneurs can attract private equity investment

Most entrepreneurs will need some form of private equity investment to launch their businesses. To attract interest from PE funds, you must be prepared to:

make sure the business is well organised

assemble a talented and loyal team

give up part of your business to investors

have ambitious growth plans

share important decisions with major shareholders

prove your business has a competitive advantage over your rivals

agree an effective exit strategy for investors

Find the right kind of private equity funding

There are various forms of PE funding for different phases of a company's development, eg:

Seed financing - funding while you research and develop a project or concept until you are ready to launch a company. This form of PE is mainly provided by business angels - see business angels.

Start-up financing - to help you develop a product and begin marketing it. This sort of funding is often based on your business plan and VC investors may often join your company to help bring the product to market.

Post-creation funding - capital used to finance manufacturing a product and a sales drive, so your company can begin to make profits.

Expansion and development - investment is used to increase production capacity and sales activity, for companies growing strongly.

Transfer or succession funding

Transfer or succession funding is a form of VC investment used to finance management buy-outs or buy-ins - eg after the retirement of a company's founder or chief executive officer.

It can also be used when:

a large company sells off a business unit

investors buy shares in a family firm

investors from earlier stages of a company's development exit the business

VC fund managers attract transfer funding by creating a holding company - using it to seek funds, in the form of debt, to buy the target business. Once this has been done, they use the target business' dividends to pay off the debt.

Alternatives to private equity funding

You may find that other forms of funding are better for your business than VC funding such as loans and overdrafts or government 91�㽶��ɫ��Ƶ - see business financing options - an overview.
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Advantages and disadvantages of venture capital

Potential benefits and drawbacks of venture capital.
Before deciding on venture capital funding, you should consider the possible benefits and drawbacks.

Advantages of venture capital

Raising money through venture capital can have many benefits, including:

Access to larger amounts of funding - typically over £250,000.

No monthly repayments - as a venture capital company invests for equity, monthly repayments are not required which ensures working capital is available for your business.

Expert business management 91�㽶��ɫ��Ƶ - most venture capital companies have relevant previous experience so you can benefit from expert advice and problem solving abilities.

Networking opportunities - venture capital organisations have many connections, including other start-ups and businesses.

Possibility of future funding - venture capital companies are keen to see your business raise additional funds as it increases the return on their investment.

Disadvantages of venture capital

There are also potential drawbacks to venture capital, including:

Risk of losing business - if your business underperforms, investors may pull out of your agreement.

Reduction of ownership - especially if additional rounds of funding are required, founders can gradually lose more equity, their decision-making abilities and control of the company.

Attention diverted from the day-to-day running of the business - a lot of time has to be put into raising funds and ensuring the business meets the venture capital organisation’s standards.

It can be difficult to get approved - venture capital businesses will need to see that your business is suitable by accessing your business plan, financial forecasts and other documents as part of their due diligence.

Expensive process - you may notice the cost of the equity when the business is sold as your shareholders will have a right to a certain percentage of the business.
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Finding and approaching venture capital investors

How to find the right venture capital investment fund and convince it to invest in your company.
Before you approach a venture capital (VC) organisation, you should research what sort of private equity (PE) funding would be best for your business needs. Different types of investment - eg seed funding, product development and succession funding - are suitable for different stages of business development.

When choosing a VC fund, look for:

funds targeting your business sector

investment criteria

quality of advice and 91�㽶��ɫ��Ƶ provided by investors

amount of finance - some PE firms specialise in investments below £100,000

geographical location of PE investors and how near they are to your company

The British Private Equity and Venture Capital Association (BVCA) publishes an annual report on private equity investment and you may find that this is a useful research tool.

Search the BVCA directory of members (registration required).

Matching investment criteria

VC managers will invest only in companies that match their investment criteria. You should carefully check this before making an approach. You should also make sure that your business plan is up-to-date with detailed financial forecasts tailored to the investor concerned.

Business plans are used by investment managers to assess:

your business' funding needs

whether your plans for the business are achievable

whether you need external investment

See write a business plan: step-by-step and tailor your business plan to secure funding.

Making your business investment ready

Your business also needs to be investment ready, which means providing:

audited accounts for the past two years

evidence of current performance

profit-and-loss forecast for next year

business bank statements for the past six months

profiles of each partner or director in your business

See secure equity investment.

Data confidentiality

Once a VC investor firm has shown interest in your outline proposals, you can prepare a letter of confidentiality. This should be signed both by your business and the potential investors before you send them your full business plan.
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Negotiating a venture capital investment deal

The negotiation stages for a venture capital investment deal.
Negotiations for investment with a private equity venture capital (VC) business can last up to a year, and follow several key stages, from presenting your business plan to final negotiations and sign-off for the investment agreement.

Special advisers

Most companies seeking VC funding employ specialists to advise them on the various stages of the negotiation process. They can include:

accountants - who can help you draw up and review your business plan

legal and tax advisers - for legal planning and fiscal aspects of the deal

Six stages of a venture capital investment deal

1. Presenting your business plan

Use your first meetings to try to decide whether you would feel comfortable working with the investors long term. You should also research the fund's investment performance with similar companies, and how it operates.

After you present your business plan, the investor will decline your proposal, request more information, or ask for another meeting.

2. Initial negotiations

If they are happy with your outline proposals, the fund managers may offer you an initial memorandum. This is a programme of further negotiations, based on your business plan.

3. Company valuations

Price negotiations centre on the amount of equity you are prepared to give up in exchange for investment. The agreed price forms the basis of the fund's return on investment.

Both you and your potential investors can use analytical tools to determine values.

Common valuation tools include:

measuring discounted cashflows - comparing positive cashflows with risk-free investments such as a government bond, and building in a risk factor 'discount'

comparing your company to similar companies - eg in terms of profit, cashflow and turnover

opportunity cost analysis - comparing the likely profitability of your proposal with that of investments with similar risks

4. Offer letter

After agreeing a valuation, the fund will give you an offer letter, detailing its proposed investment. The document summarises the interim terms of the deal, subject to due diligence. Once you have accepted the letter, due diligence and final negotiations can take place.

5. Due diligence

Fund managers must ensure they have exercised due diligence before they invest in your company. This involves audits by lawyers and other consultants of both your company and your proposal.

6. Final negotiations

During final negotiations, the terms of the deal are agreed and signed off.

At this stage, you and your senior management team can negotiate your personal equity stake in the company, post-investment. This should take into account issues such as the company valuation and the investors' exit strategy.

Investment deal documentation

After sign-off, lawyers for the parties will draw up acquisition documents, detailing the terms of the negotiated contracts according to legal requirements. These include:

shareholders' agreement - the rights and obligations of each party

investment protocol - share prices and numbers of shares

changes to company statutes

warranty letters

contracts with senior and junior members of staff

All parties should then sign the final agreement. At this point, the capital funds will be released to your company. For a management buyout, sign-off marks the point where the holding company acquires the target company.
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How venture capital investors work with and exit from companies

How the relationship between a private investor and company works.
If you accept funds from an external investor, you must share information about your company with them and delegate some decision-making. You can draw up a shareholders' agreement to establish how joint decisions will be made, and to balance the interests of different shareholders.

The shareholders' agreement will also cover the rights and duties of your investment fund managers, eg:

receiving regular company performance reports

consultation on important decisions, eg business acquisitions and disposals

control of the exit process

Day-to-day operations

You should keep in contact with your fund managers, as they can help you with strategic decisions and issues such as:

organising further investment

negotiating with banks

negotiating the sale of the company to partners in the sector

Investing fund managers generally leave day-to-day operations and growth strategies to the company's senior management. They may, however, take a more hands-on role if there is a crisis, if the company is a start-up, or if the investment is a complex one, eg a debt-financed operation.

Company committees and boards

Most fund managers will expect to be present or be represented on a company's board, subject to normal corporate governance standards.

Financial board members are subject to their own professional codes of conduct, including those which cover conflicts of interest between different investments. Fund managers can also play an active role in important committees, eg for audit or remuneration.

Liability

A fund manager sitting on a company board has a duty of care to its shareholders and creditors. They will generally avoid involvement in day-to-day operations, as this will increase their liability should the company collapse.

Experienced fund managers should be able to identify signs of crisis in a company, such as a sharp rise in fixed costs or high staff turnover.

Exit strategies

Venture capital (VC) investors may decide to sell their investment and exit a company. Alternatively, the company's management can buy the investor out (known as a 'repurchase').

Other exit strategies for investors include:

sale of equity to another investor - secondary purchase

stock market floatation

liquidation - involuntary exit

Private equity firms may decide to not sell all the shares they hold. In the case of a flotation, they are likely to hold the newly-quoted shares for at least a year.

The exit value of a company must be mutually agreed between all parties, and will depend on:

the type of operation

the number of shares sold

the original valuation of the company

Private equity funds have either a limited lifespan - usually ten years - or they can continue to operate as long as they have capital to invest.

For further information see secure equity investment.
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Communicating with business investors

How to legally contact potential investors when trying to raise finance for your business.
Communications with potential investors - eg sending a business plan to them - are classed as financial promotions and regulated under the Financial Services and Markets Act (FSMA).

Under the Act, anyone carrying out a financial promotion must be authorised by the Financial Conduct Authority (FCA), although most proposals sent to private equity houses seeking funds are exempt from the restrictions.

Under FSMA rules, you are not allowed to include 'misleading statements' in documents, such as a business plan, designed to induce or persuade people to:

enter into investment agreements

buy or sell shares in companies

You must be able to prove any statement, promise, or forecast, contained in any communication or document you send to potential investors.

You should consult your legal adviser to ensure compliance with the rules on financial promotions, before approaching potential investors.
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Causes of cashflow problems in your business

kmcgowan — Mon, 16 Oct 2023 09:28:43 +0000

Causes of cashflow problems in your business kmcgowan Mon, 16/10/2023 - 10:28

Identify potential cashflow problems

In this guide:

Causes of cashflow problems in your business

Common causes of cashflow problems including late customer payments and seasonal demand.

Some common causes of cashflow problems can be avoided if you are prepared for them.

Poor financial planning

If your business doesn't have a working budget, there won't be a healthy financial focus on your business. A budget will help you to create specific and realistic goals and is a guide on considering what to spend throughout the year. See keep business finance forecasts up to date.

Emergency funds

If you haven't set up an emergency fund, it may be difficult to continue trading if unexpected expenses come up. These could include a tax bill, increase in supplier costs or repairs to premises. You could start by working out how much you might need and begin to save even a small amount each month.

Late customer payments

When customers make late payments, financial problems can quickly arise. Making some small changes can help you to avoid this situation, including sending invoices quickly and accepting multiple payment options. See ensure customers pay you on time.

Uncontrolled growth

Growth of a business is generally a good thing, but if it comes quickly, it could mean you need to scale up accordingly with more employees or better equipment. See should I grow my business?

Seasonal demand

Some businesses do the majority of their trading during a short part of each year which can cause irregular cashflow patterns. There are a number of steps that you can take to ensure cashflow is managed effectively.

Low profits or losses

Profit is the main source of cash in a business so if there isn’t enough coming in, all of your outgoings may not be covered. This could lead to borrowing more than you can afford and further problems down the line.

Low profits can be caused by issues such as low staff productivity, poor ordering and delivery processes and ineffective marketing. See how to turn around a struggling business.

High overhead expenses

If overheads such as your rent, internet and other utility bills are too high, it could become difficult for you to pay them on time. You should review all of your expenses on a regular basis, and identify those you can cut down on or switch to a cheaper option. See set up a profit and loss account for your business.

Overstocking

Excessive inventory or overstocking can impact cash moving in and out of your business. If you predict your orders, you can work out how many you should receive in a week or a month so you can stock what you need. You could do this manually or use an inventory management system. See stock control and inventory.

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Keep business finance forecasts up to date

Why and how you should assess and maintain your budgets and business plans on a regular basis.
Keeping an accurate and up-to-date budget or business plan will help you manage your cashflow, by allowing you to:

record actual figures

compare actual figures with the budget or plan

record any inconsistencies and investigate the reasons for them - eg a one-off, seasonal demands, changes in the economy or problems in your business that could be improved

review whether the budget or plan should be updated

You should also consider completely new factors such as an unexpectedly large order or the arrival of a new competitor on the market, and whether these changes need to be incorporated into your business plan or budget. You might choose to:

Keep the original budget - but measure and understand any variances in the actual figures against the original budget and new forecasts.

Use rolling budget/forecasts - as each month's actual information is finalised, update the budget to provide an additional month's data. This means that you will always have a 12-month projection.

Whatever system you use, it is important to keep your eye on the forecasts and keep them up to date. See business budgeting.
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How changing market conditions can affect your business

How competitors and market conditions can affect business cashflow.
In order to identify and deal with any potential problems, you should always be aware of any outside developments and market conditions that could affect your business, and, if necessary, be ready to respond and change your plans quickly.

You should always be aware of:

Interest and exchange rates - these can have an influence on the general trading climate and are not just a matter of direct costs. For example, interest rates may affect certain industries more than others and at different times, and foreign exchange rates could affect how easy or profitable it is to do business with another country.

Your competitors - both existing ones and new ones, and what their strengths and weaknesses are.

New technologies and innovations that could change the market and increase or reduce the demand for your existing product or service.

All businesses experience changes in the general sales environment at some point. These changes could affect the entire economy - such as a recession or economic downturn - or they might only affect a specific industry or sector. It is important to be alert to possible changes and amend your forecasts and plans to compensate for them in order to avoid potential cashflow problems.
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Working with banks and other lenders

How to use your bank and bank account to improve your cashflow and avoid problems.
You can benefit if you maintain good relationships with your bank and other lenders. They may be able to offer advice, or they may raise concerns that you need to address.

When looking for finance or reviewing your relationship with banks or other lenders, you should:

Consider all the options available to you before accepting a loan, overdraft or other form of finance - see business financing options - an overview.

Try and negotiate a satisfactory agreement at the outset. Most overdrafts are repayable on demand - this is rarely enforced, but that doesn't mean it won't happen.

Try and build good personal relationships with the person responsible for your account with regular communication.

Keep your bank or lender informed and tell them the bad as well as the good news. If you have a problem, explain what action you will take to solve it.

Keep all your figures up-to-date and pass them to the bank - see keep business finance forecasts up to date.

Consider alternative sources of funding to suit your business needs.

Consider using services to reduce the time between expenses and income - such as factoring, invoice discounting, leasing, or equipment hire purchase - see factoring and invoice discounting.

MoneyHelper provides information about your rights in relation to loans and cards.

Better Business Finance provides information about the appeal process if you have been refused finance.

Short term finance providers

When cash is tight or if your bank has refused a loan, there may be a temptation to look for a quick loan to tide the business over. There are many loan providers that will provide cash quickly, but you should always consider the risks fully.

For more information, see non-bank finance.
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Signs that your customers are in financial trouble

The importance of staying aware of your customers' financial situation.
If you only have a few customers, and one of them has money problems and can't pay what they owe you, it can have a serious impact on your business. It is good practice to avoid relying on a small number of customers if possible, but it is also important to be vigilant and look out for signs that any of your existing or potential customers are in financial trouble.

There are several signs that a customer may be struggling financially - for example:

a change for the worse in payment patterns

frequent mistakes on cheques - these could be an indication that they are avoiding paying or buying time

they are refusing to talk to you or are putting off payment for little or no reason

smaller or less frequent orders than usual

they unexpectedly or suddenly request an extension to their credit limit

if your customer is another business, you or your sales staff may see problem signs when visiting their premises - eg unsold stock

If you supply to a business and are concerned that they may be in difficulties, you could consider:

Using a credit agency - they will provide you with access to databases with up-to-date financial information about businesses. You can find your customers' credit-worthiness with Equifax or Experian.

Accessing their accounts - if your customer is a limited company - on Companies House.

You should also speak to your customers. If they are struggling financially, you may be able to help them by renegotiating their payment terms. This may delay your income, but it could also retain the customer in the future by 91�㽶��ɫ��Ƶing them during a difficult period.
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Advantages of credit checking customers

kmcgowan — Tue, 05 Sep 2023 09:24:46 +0000

Advantages of credit checking customers kmcgowan Tue, 05/09/2023 - 10:24

Credit checking your customers and setting credit limits

In this guide:

Advantages of credit checking customers

Why credit checking current or potential customers is so important.

Whether you're checking current or new customers, there are several reasons why it’s important to carry out credit checks.

Important risk assessment tool

Late customer payments are one of the biggest risks facing businesses. Chasing late payments costs money and can have a negative impact on your business. Carrying out a credit check can help you to protect the financial health of your own business.

Insight into customers’ financial situations

A credit check can provide detailed information about your customer’s credit history which will allow you to have the confidence to choose new customers or positively reinforce your relationship with current ones.

Help to set credit limits

It can be useful to offer customers credit, but the larger the amount of credit you offer, the greater the risk. A credit check can determine if credit should be offered and how much it should be.

Contribution to ongoing monitoring

Running credit checks on your customers and even your suppliers gives you valuable insight into the financial health of your entire supply chain, and allows you the insight to make an informed decision on credit-related issues.

Accurate and informed decisions

The information found in a credit report can be used to inform your sales strategy, helping you to approach potential customers who have the resources to pay you.

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How to credit check potential customers

How you should go about credit checking other businesses before they become your customers.
If you don't know a potential customer's credit history, there is a risk of being paid late or not being paid at all.

You should ask all potential customers to complete a form authorising you to get bank, credit and trade references.

The form should include:

The full name of the customer's business and any other names it trades under.

Details of who owns - and who runs - the business.

The legal status of the business, eg sole trader, partnership, limited liability partnership, public limited company. For more on the various legal structures, see legal structures for businesses - an overview.

Registration number - if it's a limited company.

How much credit is being asked for.

Full contact details of the person responsible for payment queries.

Delivery and invoice address if different.

Bank account details.

A request for consent to make bank reference checks.

A request for consent to get a credit check from a credit reference agency.

A request for consent to get at least two trade references.

You should then make the necessary checks with the customer's bank, a credit reference agency and their suppliers.
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How to credit check new customers

Ways to reduce risk if you can't credit check businesses before they become your customers.
In some circumstances, you might allow new customers credit without making the necessary checks in advance.

For new accounts making small orders, you could offer a 'fast-start limit' of around £500.

You could then apply the 80/20 rule to identify the largest accounts that make up 80% of sales. Once you have identified your most important customers, credit check them as necessary.

Ideally, all customers should be credit checked so that the amount outstanding from them is controlled and future sales efforts can be focused on your most reliable customers - there is no point wasting time on customers who represent a greater financial risk.

For more information, see credit checking potential customers.

Ongoing monitoring

You should try to monitor accounts for trends, eg slowing payments, detailed queries regarding deliveries which consistently lead to delays in payment.

If you think that you have a problem with a customer, make checks as necessary, by:

using credit insurers

getting sales or credit staff to visit the customer

getting additional trade references
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Credit checking customers: information sources

Organisations that can provide you with information on potential or new customers when credit checking.
Other sources where you can get information on potential and new customers include:

Companies House - for checking a limited company's accounts

Northern Ireland Courts and Tribunals Service - for information on the Enforcement of Judgments Office (EJO) cases

The Insolvency Service - a registry of individual voluntary arrangements and bankruptcies

Chartered Institute of Credit Management - league tables of payment times for all public limited companies in the UK

local newspapers

online searches of individuals and businesses

If you are still unsure about the creditworthiness of a customer, you could consider having a third-party guarantee. This is a legally binding agreement with a third party that they will pay if the customer does not.

You also need to make sure your terms and conditions are correct for any credit you set up - see invoicing and payment terms.
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Setting levels of customer credit

Set levels of credit for your customers according to their importance and credit rating.
It may be difficult to determine the amount of credit to give - particularly with a potential or new customer.

You can therefore get a:

credit check from a credit reference agency - see credit checking potential customers and credit checking new customers

decision from a credit insurer

Alternatively, you could make the decision yourself and set a credit limit for each customer. You should set a customer's limit according to how good their credit rating is. If their credit rating is good, you could set the limit at double their monthly sales figure. The limit should be reduced for those customers with poorer credit ratings.

The limit will need reviewing as potential sales levels change. Make sure your staff are aware of each customer's credit limit.

Risk codes

You could also devise a simple system of risk codes to apply to each account, for example:

A (low risk) - customers with the best credit references and payment records

B (average)

C (high risk) - those who your credit checks reveal have had, for example, county court judgments made against them and are therefore most likely to be slow payers

N (new) - customers you have traded with for less than six months

Once you have identified your 'C' customers, it might be better to concentrate sales efforts on the 'A's and 'B's.

However, if you can't get enough business from 'A's and 'B's you might still have to take on some 'C' accounts - there may be good profit to be had from 'C's if you monitor them carefully and minimise your risks.

You should also ensure you review the system from time to time.
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Advantages and disadvantages of business budgeting

kmcgowan — Thu, 29 Jun 2023 09:10:07 +0000

Advantages and disadvantages of business budgeting kmcgowan Thu, 29/06/2023 - 10:10

Business budgeting

In this guide:

Budgets and business planning

Definition of a budget and the advantages of using one.
A budget is a plan to:

control your finances

ensure you can continue to fund your current commitments

enable you to make confident financial decisions and meet your objectives

ensure you have enough money for your future projects

It outlines what you will spend your money on and how that spending will be financed. However, it is not a forecast. A forecast is a prediction of the future whereas a budget is a planned outcome that your business wants to achieve.

Your business plan is a roadmap for your future development. It describes your business, its objectives, financial forecasts and your market. It can help you secure external finance, measure success and grow the business.

However, for internal management purposes, budgeting can be the most effective way to control your cashflow, allowing you to invest in new opportunities at the appropriate time.

See write a business plan: step-by-step and prepare a business plan for growth.

If your business is growing, you may not always be able to be hands-on with every part of it. You may have to split your budget up between different areas such as sales, production, marketing, etc.

You'll find that money starts to move in many different directions through your organisation - having a budget is vital to ensuring that you stay in control of expenditure.
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Advantages and disadvantages of business budgeting

The benefits and potential drawbacks of budgeting for businesses.
Understanding the advantages and disadvantages of budgeting will help you to create and use them effectively.

Advantages of budgeting

There are a number of benefits of drawing up a business budget, including being better able to:

manage your money effectively

allocate appropriate resources to projects

monitor performance

meet your objectives

improve decision-making

identify problems before they occur - such as the need to raise finance or cashflow difficulties

plan for the future

increase staff motivation

Disadvantages of budgeting

There are also some potential disadvantages to budgeting, depending on the circumstances of your business:

a budget could be inflexible, and not allow for unexpected circumstances

creating and monitoring a budget can be time consuming

budgeting could create competition and conflict between teams or departments

if targets are unrealistic, employees could become stressed and under pressure
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Creating a budget for your business

How to create, review and manage a budget for your business, and what elements to include in it.
Creating, monitoring and managing a budget is key to business success. It should help you allocate resources where they are needed, and should not be complicated. You simply need to work out what you are likely to earn and spend in the budget period.

Most businesses start preparing a budget around two to three months before the start of a new financial year.

Begin by asking these questions:

What are the projected sales for the budget period? Be realistic - if you overestimate, it will cause you problems in the future.

What are the direct costs of sales - ie costs of materials, components or subcontractors to make the product or supply the service?

What are the fixed costs or overheads?

You should break down the fixed costs and overheads by type, eg:

cost of premises, including rent or mortgage, business rates and service charges

staff costs eg pay, benefits, National Insurance

utilities eg heating, lighting, telephone or internet connection

printing, postage and stationery

vehicle expenses

equipment costs

advertising and promotion

travel and subsistence expenses

legal and professional costs, including insurance

Your business may have different types of expenses, and you may need to divide the budget by department. Don't forget to add in how much you need to pay yourself, and include an allowance for tax.

HM Revenue & Customs (HMRC) provides email updates, videos and webinars if you’re self-employed.

The budget should be in place before the start of the financial year. Your business plan should help in establishing projected sales, cost of sales, fixed costs and overheads, so it would be worthwhile preparing this first. See write a business plan: step-by-step.

Once you have figures for income and expenditure, you can work out how much money you're making. You can look at your costs and work out ways to reduce them. You should also be able to spot if you are likely to have cashflow problems - giving you time to do something about them.

You should stick to your budget as far as possible, but review and revise it as needed.
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Creating a business budget: key steps

Managing the financial side of your business, including advice on how to create a budget.

There are a number of key steps you should follow to make sure your budgets and plans are as realistic and useful as possible.

Make time for budgeting

If you invest some time in creating a comprehensive and realistic budget, it will be easier to manage and ultimately more effective.

Use last year's figures - but only as a guide

Collect historical information on sales and costs if they are available - these could give you a good indication of likely future sales and costs. It's also essential to consider what your sales plans are, how your sales resources will be used and any changes in your market or the competitive environment.

Create realistic budgets

Use historical information, your business plan and any changes in operations or priorities to budget for overheads and other fixed costs.

It's useful to work out the relationship between variable costs and sales and then use your sales forecast to project variable costs.

Make sure your budgets contain enough information for you to easily monitor the key drivers of your business such as sales, costs and working capital. Accounting software can help you manage your accounts. See accounting software.

Involve the right people

It's best to ask staff with financial responsibilities within the business to provide you with estimates of figures for your budget - for example, sales targets, production costs or specific project control. If you balance their estimates against your own, you will achieve a more realistic budget. This involvement will also give them greater commitment to meeting the budget.

You could also ask your accountant to review your budget figures or to put the final budget figures together.

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What should be included in a business budget?

Projected costs, revenues, cashflow and profit are some of the elements to include in a budget.
You should first decide how many budgets you really need. Many small businesses have one overall operating budget which sets out how much money is needed to run the business over the coming period - usually a year. As your business grows, your total operating budget is likely to be made up of several individual budgets such as your marketing or sales budgets.

What your budget will need to include

Projected cashflow - your cash budget projects your future cash position on a month-by-month basis. Budgeting in this way is vital for small businesses as it can pinpoint any difficulties you might be having. It should be reviewed at least monthly - see cashflow management.

Costs - typically, your business will have three kinds of costs:

fixed costs - items such as rent, rates, salaries and financing costs

variable costs - including raw materials, overtime and tax

one-off capital costs - for example, purchases of computer equipment or premises

To forecast your costs, it can help to look at last year's records and contact your suppliers for quotes.

Revenues - sales or revenue forecasts are typically based on a combination of your sales history and how effective you expect your future efforts to be.

Using your sales and expenditure forecasts, you can prepare projected profits for the next 12 months. This will enable you to analyse your margins and other key ratios such as your return on investment - see plan and forecast sales.

If you want to improve your financial skills and knowledge, learndirect provide an online course on business finance.
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Using your budget to measure business performance

Benchmark your business using your budget projections and key performance indicators.
Your budget can be a financial action plan. This can be useful, particularly if you review your budgets regularly as part of your annual planning cycle - see prepare a business plan for growth.

Your budget can serve as:

an indicator of the costs and revenues linked to each of your activities

a way of providing information and 91�㽶��ɫ��Ƶing management decisions throughout the year

a means of monitoring and controlling your business, particularly if you analyse the differences between your actual and budgeted income

Benchmarking performance

Comparing your budget year on year can be an excellent way of benchmarking your business' performance - for example, you can compare your projected figures with previous years to measure your performance. See plan and forecast sales.

You can also compare your figures for projected margins and growth with those of other businesses in the same sector, or across different parts of your business.

Key performance indicators (KPIs)

To boost your business' performance you need to understand and monitor the key 'drivers' of your business - a driver is something that has a major impact on your business. There are many factors affecting every business' performance, so it is vital to focus on a handful of these and monitor them carefully.

The three key drivers for most businesses are:

sales

costs

working capital

Any trends toward cashflow problems or falling profitability will show in these figures when measured against your budgets and forecasts. They can help you spot problems early on if they are calculated consistently. See deciding which key performance indicators to measure.
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Reviewing your business budget regularly

When and why to review your budget and the main steps involved.
To use your budgets effectively, you will need to review and revise them frequently. This is particularly true if your business is growing and you are planning to move into new areas.

Using up-to-date budgets will help you manage your cashflow effectively and identify what needs to be achieved in the next budgeting period.

Income and expenditure

There are two main areas to consider when reviewing your budget - income and expenditure.

Your actual income - each month, you should compare your actual income with your sales budget.

To do this, you should:

analyse the reasons for any shortfall - for example, lower sales volumes, flat markets, and underperforming products

consider the reasons for a particularly high turnover - for example, whether your targets were too low

compare the timing of your income with your projections and check that they fit

Analysing these variations will help you to set future budgets more accurately and also allow you to take action where needed.

Your actual expenditure - regularly review your actual expenditure against your budget. This will help you to predict future costs with greater reliability.

You should:

look at how your fixed costs differed from your budget

check that your variable costs were in line with your budget - normally variable costs adjust in line with your sales volume

analyse any reasons for changes in the relationship between costs and turnover

analyse any differences in the timing of your expenditure - for example, by checking suppliers' payment terms
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Signs your business is overtrading

kmcgowan — Wed, 21 Jun 2023 14:29:19 +0000

Signs your business is overtrading kmcgowan Wed, 21/06/2023 - 15:29

Avoid the problems of overtrading

In this guide:

What is overtrading?

How insufficient finance and resources to sustain a business’s level of trading can lead to overtrading.

Overtrading takes place when a business accepts work and tries to complete it, but finds that fulfilment requires greater resources (ie cash, people, stock) than are available. This can be caused by unforeseen events such as:

manufacturing or delivery taking longer than anticipated, resulting in cashflow being impaired
customers making late payments
rising prices of stock or machinery, which results in overspending by the business

Overtrading is a common problem, and it often happens to recent start-ups and rapidly expanding businesses. Cash often has to leave the business before more cash comes into it. For example, wages and salaries are usually payable weekly or monthly, and there may be other expenses that need to be met promptly, such as telephone bills and rent.

Although you may pay suppliers on credit, your customers may also pay you on credit. It doesn't take much to upset the balance.

It is also possible to run out of cash, even if your customers pay cash and do not have credit accounts. For example, you may have to pay suppliers quickly, perhaps even in advance, or you may have to hold stock for a long time. What matters is the amount of working capital and the timing of cash coming in and going out of the business.

Working Capital

Working capital is the difference between current assets and current liabilities. In the following example, working capital, or net current assets, amounts to £3,000.

	£
Current assets
Stock Current assets	66,000
Debtors (owing by customers)	37,000
Total Assets	103,000
Current liabilities
Creditors (owing to suppliers)	71,000
Bank overdraft	29,000
Total Liabilities	100,000
Net current assets	3,000

Whether or not £3,000 is sufficient working capital depends on the circumstances of the business.

For further information see assessing your cash needs: assets and liabilities.

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Signs your business is overtrading

Be mindful of the symptoms of overtrading so you can try to prevent it.
You should be aware of the signs of overtrading so you can try to resolve the situation before it becomes unmanageable.

Classic symptoms of overtrading include:

lack of cashflow

persistent use of a bank overdraft facility

loss of supplier 91�㽶��ɫ��Ƶ

excessive borrowing

high revenue growth but low gross and operating profit margins

very low inventory turnover ratio

low levels of capacity utilisation

inability to meet obligations on a frequent basis

key financial staff leaving the business

Overtrading can have serious consequences for a business, making it important to be mindful of this risk and take steps to prevent it.

See avoid the problems of overtrading: debts and avoid the problems of overtrading: assets.
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Matching sales and production cycles

Ensuring a closer match between sales and production cycles can help avoid overtrading.
There can be many causes and contributory factors, but for manufacturing businesses a mismatch between sales and production cycles is often at the heart of an overtrading problem.

It follows that the problems can be at least reduced, maybe even eliminated, if the sales and production cycles can be matched.

If you are a trader, you may be able to hold stocks for a shorter period. If you are a manufacturer, you may be able to hold fewer components for a shorter period and speed up the manufacturing process.

Just-in-time

It may be helpful to employ just-in-time (JIT) techniques. As the name suggests, this is where goods and materials are delivered just in time for you to use them. JIT systems can help you with:

shortening the manufacturing cycle

reducing the period that you hold stock

reducing the need for working capital

However, JIT systems may not be easy to establish. One problem is that there are no obvious benefits for your suppliers. Indeed it could be a disadvantage for them, because they will probably have to invest in new systems, hold stocks themselves and make frequent small deliveries.

For this reason, JIT often works best when you are able to work as a team with your suppliers. To achieve this you may need to give them something in return, such as guaranteed regular orders or even on-delivery payment.

A potential disadvantage of JIT is that you are cutting down your margin of safety. You will need to ensure you have good systems, good planning and reliable suppliers if it is to work.
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Assessing your cash needs: assets and liabilities

Gearing ratios, working capital ratios and quick ratios are useful tools to compare assets and liabilities.

It is often helpful to compare the assets and liabilities of your business, as it can be useful for forecasting what your assets and liabilities will be in the future. You can do this by using cashflow forecasting and ratio analysis. However, for either to be effective, you need up-to-date and reliable financial records.

Cashflow forecasting

Since cash is essential to a business, a cashflow forecast is one of the most important management tools you can use. If you are expecting a rapid increase in business, an accurate cashflow forecast is vital. This predicts the money coming into and going out of the business and, to be effective, it needs to be broken down into relevant periods - monthly, weekly, or even daily.

See cashflow management.

Ratio analysis

There are various ratios that need to be monitored in order to avoid overtrading. Along with cashflow forecasting, these ratios will help you understand your own business' cash needs. Forecasting future ratios is an invaluable way of predicting the effect of a rapid increase in workflow.

Working capital and quick ratio

Working capital is the difference between current assets and current liabilities. Clearly, the safest position to be in is to have more assets than liabilities, and the bigger the difference the better.

Quick ratio is a more demanding way of measuring cash needs. Stock is completely left out of the current assets total because it might take some time to turn into cash. Only investments, money in the bank, cash and money owed by customers are counted.

Gearing

This is the percentage of money borrowed from the bank compared with money provided by the owners and other investors. For example, suppose that the bank lends the business £40,000 and the shareholders provide £60,000. The gearing would be 40%, because the bank provided 40% of the total.

Gearing can help a business by boosting cash, but it does involve borrowing potentially large sums of money.

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Assessing your cash needs: creditors and debtors

Debtor days ratios and creditor days ratios estimate how long you take to pay debts and customers take to pay you.

In order to assess your cash needs accurately you need to use accurate, up-to-date figures or, when these are not available, use forecast figures.

You can avoid overtrading by checking your cash needs using financial tests such as gearing, working capital or the quick ratio tests. See assessing your cash needs: assets and liabilities.

Two other useful comparisons are debtor days ratio and creditor days ratio.

Debtor days ratio

This shows how long, on average, your customers take to pay you. For example, your customers owe you £14,000 on a given date. Your annual turnover is £100,000. Multiply the amount owed by the days in the year, 365, and divide the result by the annual turnover, £100,000:

(£14,000 x 365)/£100,000 = 51 days

So each customer is taking 51 days, on average, to pay. Remember this calculation can be distorted if your business is very seasonal, so it works best if your invoices are spread evenly throughout the year.

Creditor days ratio

This shows how long, on average, you are taking to pay your suppliers. For example, you owe your suppliers £9,000 on a given date and across the year you pay out £150,000. Multiply £9,000 by the days in the year, 365, and divide the result by the total amount you pay:

(£9,000 x 365)/£150,000 = 22 days

Suppliers are, on average, being paid in 22 days. Again, seasonal differences can influence the results so this calculation works best when your purchases are made evenly during the year.

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Avoid the problems of overtrading: debts

Debt factoring, prompt payment discounts and regulating cashflow help reduce the risk of overtrading.

Effective debt management and credit control can help you avoid overtrading. In addition to managing debt more effectively and improving credit control, you should also think about changing some or all of your business practices.

Consider the following business practices to help reduce the risk of overtrading.

1. Set new payment terms

You could renegotiate payment terms, or tell customers that new terms will apply for future orders, but you should be aware that customers may object. Much will depend on the strength or weakness of your competitive position.

2. Offer discounts for prompt payment

This can be effective in accelerating payment, boosting cashflow and reducing bad debts. However, there are disadvantages - it can be expensive and must be policed to ensure that customers only take discounts when they pay promptly. See invoicing and payment terms.

3. Encourage automated payments

Automated systems of payment should be encouraged over more traditional methods such as sending cheques by post. Using systems such as BACS or CHAPS will prevent the risk of bounced, missing or lost cheques and have the advantage of providing payment certainty. Read about BACS payments.

4. Use factoring or invoice discounting

Factoring involves selling your invoices to a specialist finance company which takes on the administration and cost of recovering the invoice payments. With invoice discounting, you raise a loan from a finance company against the value of your invoices, but you keep the responsibility and cost of recovering invoice payments. See factoring and invoice discounting.

5. Negotiate payment terms with your suppliers

You could try to negotiate different payment terms with your suppliers. Simply taking longer to pay may be considered unethical, and you may find that some suppliers refuse to supply you if you habitually take too long to pay. Businesses are also entitled to charge interest on late payments.

6. Improve your stock control

It costs money to hold stock and raw materials, so turning them over more quickly will cut costs.

Faster stock turnover means that there will be a shorter interval between the time that you have to pay your suppliers and the time that your customers pay you for the same goods.

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Avoid the problems of overtrading: assets

How to solve cashflow shortfalls and bring new money into the business in a variety of ways.

One way you can help prevent overtrading is by keeping a tight control of the money you have going out of your business to pay for assets.

Consider the following to help reduce the risk of overtrading.

1. Lease your assets or buy them on hire purchase

Leasing is a way of acquiring assets by making regular payments, but without buying them outright. Hire purchase is a similar way of paying for assets, but you end up owning them. See decide whether to lease or buy assets.

2. Inject new capital

This could be new share capital, a long-term loan, or the sale of shares to a new equity partner.

The downside of this is that you may have to give up some control of the business, or pay a high rate of interest. See equity finance and bank finance.

3. Reduce the money taken out

This might not be a welcome suggestion but perhaps it should be considered. It may mean not paying dividends. If your business is a partnership or you are a sole trader, it may mean taking less salary, fees or benefits.

4. Cut costs and be more efficient

This is easy advice to give and you are probably already doing what you can, but if you can cut costs further, it should increase your cashflow and cut the risk of overtrading. It should also increase profits. See cashflow management.

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Example of overtrading

A case study of a situation of overtrading and the potential disaster it causes.

Emily's business is three years old. Her annual turnover is £200,000 and her annual profit is £18,000. She operates with a bank overdraft of up to £25,000. Her working capital is sufficient to steadily expand the business.

Emily succeeds in winning a contract to supply Business A. The order is for £40,000 a month for two years. She will be paid 75 days after delivery.

She rings her suppliers. She orders everything that she will need to fulfil the contract in the first few months. She tells them all to deliver everything as soon as possible.

The first month

Things go very well. All the suppliers start delivering as promised. The only problem is that she is short of space.

The second month

Things still look good. She has made the first delivery to Business A. She increases her overdraft.

The third month

Emily has problems. She has made more deliveries to Business A but her overdraft is at the limit. She is getting calls from unpaid suppliers.

The fourth month

Emily has a crisis. She cannot pay all her suppliers. Some have stopped delivering and are threatening legal action. She thinks that she will be fine because she is still supplying Business A.

The fifth month

Her overdraft is £4,000 over the limit. Three suppliers start legal action. The bank refuses to pay any more cheques. But her first payment from Business A arrives on time.

The sixth month

The next Business A payment does not arrive on the due day. She cannot fulfil any more orders. The bank demands that the overdraft be repaid within seven days.

Emily closes the business and blames the bank. However, if timings and payments of deliveries from suppliers and to customers had been negotiated and regulated more successfully beforehand and at the start, the closure may have been avoided.

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How to avoid overtrading: example

A case study of how to avoid a situation of overtrading and the potential disaster it causes.
Karen's business is three years old. Her annual turnover is £200,000 and her annual profit is £18,000. She operates with a bank overdraft of up to £25,000. Her working capital is sufficient for her to steadily expand the business.

Karen wins a contract to supply Business B. The order is for £40,000 a month for two years. She will be paid 75 days after delivery.

Karen's plan

Karen decides to:

Ask Business B to pay her in 45 days in return for a small reduction in the contract price. Business B agrees.

Ring her suppliers to place the orders. She orders carefully and schedules the delivery dates so that her payments are delayed for as long as possible.

Ask her biggest supplier to wait an extra 15 days for payment. In view of the bigger orders they agree.

Devote more time to persuading all her other customers to pay on time.

Avoid taking any money out of the business for three months. She has savings and can manage to do this.

Draw up an impressive written plan and present it to the bank. The bank agrees to increase the overdraft limit to £50,000.

The contingency plan

Karen finds out about factoring. She does not intend to do it but she works out how much money she could obtain if she did. See factoring and invoice discounting.

What happened?

Due to the careful management of her cash, the plan worked brilliantly. She did not need to factor her debts because she got the balance just right.

Business B was pleased and after six months increased the size of the order. Karen considered the risks of being too dependent on just one customer and began to look for new business opportunities to complement her existing business.
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What you need when applying for a bank loan

kmcgowan — Mon, 19 Jun 2023 11:14:06 +0000

What you need when applying for a bank loan kmcgowan Mon, 19/06/2023 - 12:14

Bank finance

In this guide:

Types of bank finance for businesses

Sources of short- and long-term bank finance for businesses, including overdrafts, bridging finance and mortgages.

There are several types of bank finance available to your business, with different packages available to suit your needs as your business requirements change. The type of finance that would best suit your business may be based on the purpose of the finance, how quickly you need finance, and how quickly you could repay it.

Short-term finance

Overdrafts are used in conjunction with business bank accounts and are a flexible source of working capital for short-term needs.

Bridging finance is provided by the bank to businesses to maintain cashflow while awaiting funds from grant cheques, drawdown of commercial mortgages or loan agreements, or other confirmed sources of future income.

Working capital funding

Invoice finance offers ways to access working capital by unlocking the value of invoices, although interest rates and charges apply on the cash advanced. Invoice discounting allows you to draw on funding secured against approved invoices, while in factoring you can sell invoices to your financier. If your buyer introduces a supplier finance scheme (also known as supply chain finance or reverse factoring), this will provide the same benefits at a potentially much lower cost.

See factoring and invoice discounting.

Medium-term finance

Term loans have a fixed or variable interest rate and mature over a one- to seven-year period. They are typically used to buy fixed assets such as property or machinery or other purchases of a capital nature.

Asset finance and leasing options allow businesses to spread the ownership associated with buying assets. When you buy assets through leasing finance, the leasing bank buys the equipment for you to use, in exchange for regular payments. Leasing or hire purchase can help you maintain cashflow and allow greater flexibility in upgrading equipment.

For more information, see decide whether to lease or buy assets.

Long-term finance

Commercial mortgages are provided by banks to finance the purchase of business premises. Types of mortgage available include repayment, commercial endowment or pension. The mortgage will usually be repayable over a 15-year period.

You can get advice on the best providers of commercial mortgages from your bank's business adviser or a commercial mortgage broker. For more information, see commercial mortgages and lenders.

Fixed asset loans are loans for assets that cannot easily be turned into cash - eg property, plant or machinery. The loans can be fixed for up to ten years. With this type of loan, the asset itself is the collateral and can be repossessed if you do not maintain repayments.

Banks may also provide a range of specialist services to fund expansions, mergers or acquisitions. For more information, see raise long-term funding through debt capital markets.

However, there may be situations when you are unable to obtain finance from a bank. If this is the case, there are other finance options available to you - see non-bank finance.

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Is your business ready for bank financing?

Even before seeking finance, you need to be clear in your own mind about why you need it, and how much.
When you seek finance for your business, you will give yourself the best possible chance of success if you are clear about your business' requirements. Consider the following:

1. Why do you need business funding?

It may be to finance business expansion, to develop or exploit new products, for new premises or a number of other reasons. It should be for something specific, and be carefully costed. Banks will want to know the business case before they agree to supply funding, so you should think about the reasoning, the potential outcomes of the investment and how you will repay the finance.

2. How much funding do you need and when will you need it?

Although it does not make business sense to borrow more than you need, you should be careful not to underestimate - aim for the optimum amount. You should also consider whether you need all of the money at once, or whether staged amounts would work, as this may reduce the cost of borrowing with lower interest costs and initial repayments.

3. How are you going to repay the borrowing?

You will need to repay the loan in the future, with interest. Ask yourself when you are likely to start seeing a return on your investment, and how much the monthly repayments will affect your cashflow.

4. What is the right source of finance for you?

There are several different types of investment finance, and you will stand a much greater chance of securing financing if you can clearly explain why the source you are approaching is most appropriate for you, and any potential drawbacks.

For more information, see types of bank finance for businesses.

5. Is there anything that would impact your chance to borrow?

There are some things which will weigh against an application for loans or other funding:

unauthorised overdrafts

missed loan repayments

County Court judgements against the business or its directors

adverse credit rating data, against the business or its directors

There are also some factors which would automatically disqualify a potential borrower. These include:

a history of illegal activity on the part of the business or individual

if the business is in administration, or the individual has bankruptcy proceedings in process against them

where the potential borrower is under the age of 18

when the business could pose a risk to the reputation of the bank

Bank finance may not be the best option for your business and there are a number of alternatives available to you - see business financing options - an overview.
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Advantages and disadvantages of bank loans

What loans are, their advantages and disadvantages, and how to know when they are suitable for your business' needs.
A loan is an amount of money borrowed for a set period within an agreed repayment schedule. The repayment amount will depend on the size and duration of the loan and the rate of interest.

Loans are generally most suitable for:

paying for assets eg vehicles and computers

start-up capital

instances where the amount of money you need is not going to change

The terms and price of loans will vary between providers and will reflect the risk and cost to the bank in providing the finance. For larger sums, the pricing and terms may be negotiable.

Banks will loan money to businesses on the basis of an adequate return for their investment, to reflect the risks of defaulting and to cover administrative costs. If you have an established relationship with your bank, they will have developed a good understanding of your business. This will help them to advise you about the best product for your financial needs.

Different types of bank loan include:

working capital loans - for short notice or emergency situations

fixed asset loans - for buying assets where the asset itself is collateral

factoring loans - loans based on money owed to your business by customers

hire purchase loans - for long-term purchase of assets such as vehicles or machinery

Advantages of term loans

The loan is not repayable on demand and so available for the term of the loan - generally three to ten years - unless you breach the loan conditions.

Loans can be tied to the lifetime of the equipment or other assets you're borrowing the money to pay for.

At the beginning of the term of the loan you may be able to negotiate a repayment holiday, meaning that you only pay interest for a certain amount of time while repayments on the capital are frozen.

While you must pay interest on your loan, you do not have to give the lender a percentage of your profits or a share in your company.

Interest rates may be fixed for the term so you will know the level of repayments throughout the life of the loan.

There may be an arrangement fee that is paid at the start of the loan but not throughout its life. If it is an on-demand loan, an annual renewal fee may be payable.

Disadvantages of loans

Larger loans will have certain terms and conditions or covenants that you must adhere to, such as the provision of quarterly management information.

Loans are not very flexible - you could be paying interest on funds you're not using.

You could have trouble making monthly repayments if your customers don't pay you promptly, causing cashflow problems.

In some cases, loans are secured against the assets of the business or your personal possessions, eg your home. The interest rates for secured loans may be lower than for unsecured ones, but your assets or home could be at risk if you cannot make the repayments.

There may be a charge if you want to repay the loan before the end of the loan term, particularly if the interest rate on the loan is fixed.

When loans are not suitable

It is not a good idea to take out a loan for ongoing expenses, as it may be difficult to keep up repayments. Ongoing expenses are instead best funded from cash received from sales, possibly with an overdraft as backup.

If you cannot obtain a loan or other type of finance from your bank, there are other finance options available to you. For more information, see business financing options - an overview.
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Advantages and disadvantages of overdrafts

The flexibility, advantages, drawbacks and costs of using an overdraft facility.
An overdraft is a borrowing facility attached to your bank account, set at an agreed limit. It can be drawn on at any time and is most useful for your day-to-day expenses as it can help you to manage your cashflow more flexibly.

It is worth noting that loans are probably more appropriate for long-term funding. An overdraft is likely to cost more than a loan for a long-term purchase.

Advantages of an overdraft

An overdraft is flexible - you only borrow what you need at the time which may make it cheaper than a loan.

It's quick to arrange.

There is not normally a charge for paying off the overdraft earlier than expected.

Disadvantages of an overdraft

If you have to extend your overdraft, you usually have to pay an arrangement fee.

Your bank could charge you if you exceed your overdraft limit without authorisation.

The bank has the right to ask for repayment of your overdraft amount at any time, although this is unlikely to happen unless you get into financial difficulties.

Overdrafts may be secured against business assets.

Unlike loans you can only get an overdraft from the bank where you maintain your current account. In order to get an overdraft elsewhere you need to transfer your business bank account.

The interest rate applied is nearly always variable, making it difficult to accurately calculate your borrowing costs.

Unutilised overdraft facilities may be reduced by the banks at short notice, although this is unlikely to happen unless you get into financial difficulties.

Bear in mind that what starts out as a good deal may change - as may your business needs. It's worth reviewing your options regularly.
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What you need when applying for a bank loan

Banks have a number of core criteria which they will take into account in assessing your finance application.
Before you look for a financial provider, you should ensure that your business is able to meet the requirements of potential lenders and secure a deal that will benefit your business.

One way to make sure your business is prepared is to ensure your business plan is up to date, and that you are well informed about your own finances. For example, you should be able to discuss:

your audited accounts for the past two years

evidence of your current performance

a profit-and-loss forecast for next year

business bank statements for the past six months

profiles of each partner or director in your business

You will also need to be clear about the amount of money you require and what it will be used for.

For more information, see cashflow management.

It is also important that your business and personal credit ratings are up to date and as free from errors as possible. You can improve your credit rating by ensuring that you:

pay your suppliers regularly

capitalise the business by investing your own funds, in the form of loans fixed against assets the business owns - eg stock, premises, vehicles

maintain a regular profit in the business, rather than taking too much out

For more information on preparing to apply for a loan, see tailor your business plan to secure funding.

Further requirements

When securing a loan, there are certain requirements you may need to fulfil. Most lenders require you to:

share the financial risk by providing capital up to the same amount as you want to borrow - demonstrating your commitment and providing a contingency for repayment if things go wrong

provide security for borrowing requests - eg personal or business assets, such as your home or business premises

provide personal guarantees if you run a limited company, and the business cannot offer adequate security

keep them informed of your progress, particularly changes or problems

have a comprehensive business plan and cashflow forecast for larger borrowing requests

have a good credit record - including a good payment record with other creditors

Agreeing the terms of your loan

Aside from discussing basic issues, such as the due date of the loan and the interest rate, you also need to:

establish what the lender's loan fees are

agree the covenants

check if you can make overpayments

see if there is an early repayment charge

find out if you can take 'repayment holidays'

check to see that late payment charges are practicable

It is often a good idea to seek professional advice on the terms of the loan and security requirements. They can help you choose the type of loan and lender best suited for your business.

Standards of conduct for lenders

The Lending Standards Board (LSB) provides standards for business customers and sets the benchmark for good lending practice in the UK, outlining the way registered firms are expected to deal with their customers.

Find out more about the LSB.
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Where to look for a bank loan

Potential lenders for a business bank loan and how to secure a loan and get the best deal.
Banks are the main source of small business loans, but many other organisations provide loans at competitive rates.

Building societies offer business mortgages and personal loans.

You can also consider finance from a non-bank lender. See business financing options - an overview.

Getting the best loan deal

You should take care to choose the right loan option that best suits your business needs.

After you have chosen the type of loan that best suits your business needs, you should also try to get the best deal available. To ensure this, you should:

Shop around - compare interest rates and negotiate to get the best deal, and ask for any special terms in writing.

Use a finance broker - this can save you time and increase your chances by presenting your proposal efficiently to appropriate lenders.

Research the small print - assess all lending criteria, such as interest rates, loan terms and set-up fees, plus special deals for start-ups. Consider having an expert, such as a solicitor, review the loan documents.

Compare loans between different banks and be prepared to switch providers.
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Choosing the right bank for your business

How to find the right bank for your business and information on specialist and private banks.
When choosing which bank to set up a business account with, it's a good idea to compare at least two before making a decision. You should consider the various services, fees and facilities that are on offer to enable you to find the best bank for your type of business.

When comparing banks, you should think about:

whether the bank has a dedicated small business team

what services they offer and how much they cost

how charges are levied - if there is a fee per transaction or a one-off charge

whether there are any additional charges - some banks charge for sending out letters or if you exceed your agreed overdraft limit

whether there is a local branch - especially if you need to make frequent cash transactions

if there are special offers for new businesses or for transferring from another bank

whether they offer telephone or internet banking - especially if there is no branch local to you

Better Business Finance provides further information on business bank accounts.

You could also open a business account with your current bank if you are happy with their service - they may be 91�㽶��ɫ��Ƶive if you have a good financial track record and have built up a relationship with them.

Once you have chosen a bank, it is important to try and develop a good working relationship to get the most of its services. See how to choose and manage a business bank account.

Specialist banks

If your business operates in the charity or social enterprise sector - eg co-operatives, employee-owned businesses or social enterprises such as local healthcare or education initiatives - there are specialised social finance banks and other financial bodies that can provide finance.

Private banks

Private banks offer bespoke financial services and avoid packaged deals normally associated with high street banks. They generally have a diverse range of products and lending services that meet the individual demands of private individual and business clients - eg lending and deposits, investment and wealth management and savings.
Help

Financial Ombudsman Service Consumer Helpline

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Providing a guarantee for your loan

How loan guarantees can help you secure funding, and details of personal and limited liability.
If your bank agrees to lend you money, it may require a guarantee. A guarantee is a promise by a person or an entity to assume a debt obligation in the event of non-payment by the borrower. Your loan agreement should make it clear exactly what security the bank needs.

Guarantees can be provided by:

you, if you run a limited company

other people involved in the business

Banks may also ask another person or business to act as a guarantor. If you cannot meet your repayments, the guarantor may have to pay part or all of the loan or interest.

If you operate a limited company, banks and major creditors will usually require personal guarantees from the company directors or major shareholders.

Limited liability protects shareholders from being sued by the business' creditors for their personal assets. Where a personal guarantee for a bank loan is issued, the guarantor can be held personally liable for the debt.

If possible, ensure that personal guarantees only apply to specific debts or loans as a widely drawn guarantee would render you liable for all of the losses of the business up to the amount of the guarantee. Under the lending code, guarantees given in 91�㽶��ɫ��Ƶ of bank account borrowing must not be for an unlimited amount.

Find information on the Lending Standards Board Standards of Lending Practice.

The Enterprise Finance Guarantee

If you need funding for your business, but cannot secure a loan, you may be eligible the British Business Bank's Enterprise Finance Guarantee (EFG).

EFG facilitates lending to smaller businesses that are viable but unable to obtain finance from their lender. Support includes:

term loans

revolving facilities, such as overdrafts

invoice finance facilities

asset finance facilities

Find out more about the EFG.
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Apply for bank finance: step-by-step

Before applying for bank finance, take a step-by-step approach so that you have the best chance of success.
When you apply for a bank loan or overdraft, you should take a step-by-step approach to make sure that you give your application the best chance of success.

Banks often have requirements checklists on their websites, or you can use this checklist as the basis for your application:

Background - explain, in writing, the key details about your business, including ownership, management team (including its experience), history and growth development. You should also identify the most important influences on your business, including your main customers, key suppliers and major competition.

Purpose - explain in detail why you want the loan or overdraft, including an indication of your aims and objectives. If you have had loans previously, explain what they enabled you to achieve.

Risks - demonstrate that you know and understand the risks that might impact on your business, and show how you have taken steps to reduce their effect, as far as possible.

Finance - explain who looks after your business' finance, outlining their experience and qualifications. Show that you have solid financial systems in place.

Accounts - you'll need to provide financial data. Most banks will want to see annual accounts for the previous three years, as well as management accounts, budgets and forecasts. If you are a new business, or if you are moving to a new bank, you will need additional information such as previous bank statements and figures showing your personal financial situation.

Amount - outline what funding you are seeking, including what it will be used for. If you are looking for an overdraft, make sure it takes into account your needs for the foreseeable future.

Funding structure - the bank or your accountant will be able to help you decide the best type of finance. It is important to have the right kind of funding structure to cover both working capital and capital investments.

Repayment - you need to be clear about how you are going to repay the borrowing. Be realistic about your business expectations and cashflow, and avoid being over-optimistic.

Security

Banks will often require your loan or overdraft to be secured when borrowing larger amounts. This can include charges over property or the company's debtors, personal or third party guarantees, or government 91�㽶��ɫ��Ƶ.

Professional advice

Your accountants, solicitors or trade bodies can provide help in structuring your case, and the bank itself will probably be able to help with loan documentation. For information on finding professional advisers, see choose an accountant for your business and choose a solicitor for your business.
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Finance

Who can apply for a venture capital scheme?

Using a venture capital scheme to raise money

Qualifying for a venture capital scheme

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Who can apply for a venture capital scheme?

Qualifying trades

Limits on the money you raise

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Types of venture capital schemes

The Enterprise Investment Scheme (EIS)

The Seed Enterprise Investment Scheme (SEIS)

Venture Capital Trust (VCT)

Social Investment Tax Relief (SITR)

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Types of venture capital schemes

Using a venture capital scheme to raise money

Qualifying for a venture capital scheme

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Who can apply for a venture capital scheme?

Qualifying trades

Limits on the money you raise

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Types of venture capital schemes

The Enterprise Investment Scheme (EIS)

The Seed Enterprise Investment Scheme (SEIS)

Venture Capital Trust (VCT)

Social Investment Tax Relief (SITR)

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Qualifying for a venture capital scheme

Using a venture capital scheme to raise money

Qualifying for a venture capital scheme

Source URL

Links

Who can apply for a venture capital scheme?

Qualifying trades

Limits on the money you raise

Source URL

Links

Types of venture capital schemes

The Enterprise Investment Scheme (EIS)

The Seed Enterprise Investment Scheme (SEIS)

Venture Capital Trust (VCT)

Social Investment Tax Relief (SITR)

Source URL

Links

Using a venture capital scheme to raise money

Introduction

Advantages and disadvantages of venture capital

Venture capital

What is private equity and venture capital?

Types of PE funds

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Is private equity right for your business?

How entrepreneurs can attract private equity investment

Find the right kind of private equity funding

Transfer or succession funding

Alternatives to private equity funding

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Advantages and disadvantages of venture capital

Advantages of venture capital

Disadvantages of venture capital

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Finding and approaching venture capital investors

Matching investment criteria

Making your business investment ready

Data confidentiality

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Negotiating a venture capital investment deal

Special advisers