As the UK enters its first recession for 11 years, it’s only sensible for business owners to consider the future challenges and opportunities they may encounter.
Why Might You Need Finance?
Finance traditionally fuels growth by allowing businesses to invest in assets, people, and systems which can improve their future profitability.
With the transition to the ‘new normal’ proceeding at pace, it is indeed time to consider the future of your sector, and how you can pivot your business to maintain and/or create new revenue streams. When done successfully, this can help you to expand your market share and customer base.
For example, would investing in new equipment and/or machinery increase your capacity to serve more customers?
This is a common reason why businesses may borrow, but any reason you might have for wanting to grow or sustain your business, is a reason you may want to speak to a lender.
Calculating How Much You Need
This can often be a challenge, but the best approach is to calculate the figures as accurately as you can, then add a small cushion to them.
For example, if you’re looking to invest in equipment to stimulate growth, first research online which equipment you’ll need and tally up all the costs – including the associated expenses of operating at an increased capacity (e.g. raised costs for utilities, staff, and other things that may be specific to your sector).
Then, create an 18-month cashflow forecast which considers the worst-case scenario for your business. Whilst this may be a depressing exercise, it gives you an honest ‘worst case scenario’.
Due to numerous factors (e.g. seasonality, larger contracts ending etc.) this will highlight when and by how much you could be in the red. Use the largest negative figure you have, add a cushion to it of around 10-15%, then consider this the amount you should apply for.
Next, create an alternative, more aspirational cashflow forecast, where you change the sales figures to reflect an ‘everything goes quite well’ scenario. You’ll enjoy this one a bit more, and it will give lenders the confidence that your application is prudent and safe under usual circumstances.
Determine What Is Affordable
So you’ve calculated how much you need, now what? Before applying for finance, it’s important you take the time to determine what you can afford.
For loans, consider your Debt Service Coverage (DSC). This is a handy behind the scenes calculation which loan assessors will be judging you on. It totals how much money is left in the business annually which can be used to make debt repayments.
Methods of calculation can vary, but the most simplistic formula would be:
Profit before tax / total of 12 months repayments
For example, if your business makes £50,000 profit per annum, you don’t want your annual repayments to exceed this figure.
If you can structure the loan over a longer repayment term, the Debt Service Coverage will increase. This reduces the stress to your business when making repayments, and increases the chances of a positive lending decision. Some lenders will have a minimum figure for DSC, typically ranging between 1 and 2. However, this varies between lenders, sectors, and the size of the business, or loan facility.
Don’t get too hung up on this figure yourself; most lenders will be happy to have an open and frank conversation with you about affordability.
When experiencing reduced revenues, consider your cashflow and calculate how long you expect to be in the red for. If the reduced revenues are likely to be only a short-term issue, then you may wish to review your terms of business with your new and existing customers and suppliers.
Taking on additional short-term cashflow facilities could offer the support your business needs, but this should only be a stop-gap solution for when your alternatives are limited. If you do pursue this option, make sure you have the ability to regularly make the capital repayments in full.
Consider Your Choices
Through 2020, lenders had to adapt. Terms imposed by the government-backed guarantee schemes mean they’ve become far more focused on a business’ previous track record and profitability.
If you have a limited trading history, you may want to research alternative lenders. They can often base decisions on the potential of the business plan and the cashflow statement, as opposed to your previous work.
There are many free online directories that can aid your research, which are often found through local growth hubs and chambers of commerce.
Equally, if you are thinking of applying for finance, or have already applied unsuccessfully, we’d love to talk to you at SWIG Finance. We are a not for profit company, set up to fill the gaps in funding created by mainstream lenders.
About SWIG Finance
SWIG Finance is the South West’s leading Community Development Finance Institution. We are passionate about bringing social and economic benefits to people and places in the South West.
We do this by providing support and finance to startups and growing SMEs who can create and secure employment opportunities.
As the South West’s leading delivery partner for the Start Up Loans Scheme, we can provide Start Up Loans from £500 – £25,000.
We also have loans from £25,000 to £250,000 available to South West SMEs who cannot access sufficient funding from their bank.
For an informal discussion about your funding requirements, get in touch with our friendly and professional team to find out how we can help!