Startup businesses need constant access to cash as the costs involved in starting and trading a new business can rack up pretty quickly. Wages, rent, stock, marketing, travel, networking to name a few expenses can all extinguish the sales income generated from your hard working activities.
So when starting up a business entrepreneurs are often caught in a catch 22 situation, they need cash to get started and grow trading but the options for obtaining that cash are limited.
The reason options are limited is because the business is not yet “good for it”, there is no previous trading history, no business credit score and often limited sales performance meaning that there is no way of proving that the business can make repayments. This makes it a very risky proposition for the bank/lender, hence why security becomes important.
In this article, we explore the things that can be used as “collateral” or “security” to increase the comfort of lenders when looking at providing your Startup with that all important cash injection.
1. Personal Guarantees (PGs)
You are the business's biggest asset at the point of a startup, you had the light bulb idea and you believe that you can make this venture a success. With this in mind, you can take responsibility for the loan personally and provide a Personal Guarantee. This means that if all else fails and the business can’t make the repayments, you as a Director will take personal responsibility for ensuring payments are made.
Many loans and other finance facilities will ask for a Personal Guarantee in addition to any other security, especially in the early stages of a business's life cycle.
2. Unpaid invoices
One of the quickest ways to get access to cash in a startup business is by securing the loan on unpaid invoices via an invoice financing product.
In simple terms, you make sales in one month equating to £40k but you won’t receive the cash into the business for 30, 60 or 90 days dependent on the payment terms agreed with the customer.
An invoice finance facility will give you access to the £40k on day 1 but the lender will then effectively own that invoice and will recoup payment once the customer repays. This is a great way of getting access to cash that grows in line with your sales and provides a constant flow.
The unpaid invoices are the security in this transaction, so the lenders are basing their facility on the strength of your customers and not so much on your business.
3. Card Payment Sales
For businesses working in a B2C (Business to Consumer) environment such as online shops, retail spaces, hotels and restaurants where sales are transactional and at the point of purchase you can look at securing a business loan on the back of your card payment transactions.
This is known as a ‘Merchant Cash Advance’ (MCA) and it’s a really flexible way of raising funds in a startup. The basic premise is that the businesses gets an up front lump sum of cash and then commits to pay an agreed percentage of all future credit and debit card transactions.
Whilst MCAs are classed as unsecured loans and no physical collateral or security is required, technically you are securing the loan on your future sales revenue and will also be giving a PG. I would say this is pretty secured!
4. Property
By far the most well know and tangible asset which can be used as security for a loan for a business. You can use your home as security for a business loan. This is a risky option as your home may be repossessed if you can’t make the repayments.
Unlike personal borrowing, financing your business can actually be pretty complex. There are many different variables that affect whether or not the line of finance is available to you and will work. for your business.
Because of the complexity you’re never comparing apples with apples, it’s likely that you would look to use %APR as a deciding factor but hidden charges, daily payments and set up fees can all mean that you end up with a facility that doesn’t work.
Whilst there are many ways in which you can potentially finance your Startup, make sure you take the advice of an Independent Commercial Finance Advisor who can guide you through the process and outline the pros and cons.
If you want to know more about your options, we are always happy to help, the ABL team is available on 01274 965356 or drop us an email.
If you want to find out further information about this topic you can get in touch with Alex via email or call her on 07903 769 037 to talk through your options.