It’s a commercial reality that the majority of businesses will benefit from an injection of capital at some time in their life cycle – whether to seize fresh opportunities, develop new capabilities or reach fresh, rewarding markets. Plus, a company will find it easier to ‘wait out’ a challenging climate, or boost cashflow, if it can dip into fresh resources and consolidate its market position. Yet there are many different types of financing available, and here, Paul Godfrey explains the options and speaks to National Bank of Abu Dhabi (NBAD) about the structure and relevance of the various key approaches…
Perhaps the most common roadblock to a business’ development is the need for a particular piece of equipment or facility, which can make all the difference between stagnation and vibrant growth. Classic examples include a dry cleaning business needing to add an extra van to its fleet, a vehicle sprayshop needing a high-end spraying booth, or a cash-in-transit operation looking for a more secure counting and storage depot.
The danger is that if, in each case, the business waits until it has the resources to afford these facilities organically, without outside help, it takes the risk of standing still and, indeed, of losing market share. In this situation, the proven solution is to apply for a business loan – an unsecured cash loan that won’t require collateral and where the repayment plan is easily affordable within the existing revenue streams (note: not within the projected revenue streams, which of course may never be achieved). In this scenario, the company doing the lending is a classic ‘risk partner’ – ie, it takes on board the risk that the company may not be able to repay, and at the same time it hasn’t taken a stake in the business or its tangible or assets, so it won’t be able to reap exponential benefits. Moreover, it’s likely to be the case that the borrower hasn’t reached full maturity and doesn’t have a range of assets against which it could secure significant sums. (It also is probably not a retailer handling large amounts of cleared funds, which again, might be very attractive as an incentive for financing).
The simplicity of the unsecured business loan is very compelling: your business meets a pre-agreed set of repayments at a pre-agreed interest rate. When the entire sum has been repaid, the two parties simply walk away. The lender (usually a bank) has no investment holding in the business whatsoever and no ongoing interest in performance or growth. Yet of course, your business has to demonstrate its ability to repay the loan, and the best way to do this is to present a set of audited accounts to the lender. Ideally, these will have been prepared by a Certified Chartered Accountant, who will have membership of one of the key professional bodies (for example, CIMA, ACCA, ICAEW, ICAI, etc.) and be attached to one of the bigger-name audit and accountancy firms. The audited accounts show revenue, cashflow, cost of sales and profit and loss: this data is fundamentally how your business demonstrates its credibility and gives peace of mind to the lender, who is basically working on trust.
Of course, because you are not giving any guarantees against the loan in the form of collateral, the lender will look to recoup sums at a relatively high interest rate compared to a secured loan. This will need to be built in to your ‘affordability’ projections. On the other hand, an unsecured business loan can be a handy and quick way to refresh and rejuvenate a business that might stall without the new purchases it makes possible.
Making the most of the resources at your disposal
A more mature business will in all likelihood have ownership of various assets that can effectively be ‘re-mortgaged’ – releasing the sums that are otherwise dormant and tied-up, and supercharging the business with a new stream of funding. The range of assets that can often be re-financed in this way include commercial vehicles, construction equipment, heavy printing equipment and medical equipment and machinery. It’s often the case that in order to be eligible for re-financing, items will need to carry a serial number or registration mark. This not only authenticates their manufacture, but establishes their age and whether the technology they represent is still current and worthwhile.
Asset-backed finance of this kind is very much like re-mortgaging a house: you release equity against an item’s current value – and generally, you can do this whether you currently own the item outright or if it still subject to an existing finance agreement. If you own the item outright, the asset-backed finance works in this way: you ‘sell’ the asset to the lender for its current value and then you can lease it back over a stated period of time, paying a monthly instalment. In order for the arrangement to be scrupulously fair, the item will normally be valued by an independent valuations specialist. As for how much cash is freed-up, this will typically range from around 65 per cent to 100 per cent of the asset value.
If the asset is covered by an existing finance arrangement, asset-backed finance can help you reduce the repayments or spread them over a longer time period. You might also be able to pay off the outstanding finance completely (depending on how much remains to be paid) and then use the remainder in the usual way, on key areas of business development.
It’s also worth bearing in mind, that in both cases you retain continued use of the asset in question – the only difference is that it now serves a double purpose. Moreover, asset-backed finance can be relatively quick to obtain, since it’s secured against tangible assets with a demonstrable re-sale value and there will be less need for the lender to undertake factfinds and complex assessments of your ability to repay.
There are certain factors to keep in mind, however, when assessing if asset-backed finance is right for you. Firstly, you will pay back more than the original value of the asset; and secondly, personal guarantees will often be required from the business owners or directors. There is also the consideration that some businesses also feel hesitant to surrender ownership of items they have worked hard to purchase – but here, the reality is that having assets lying idle is burdensome and wasteful to the business, which can otherwise utilise them fully to release valuable development capital. Also on the plus side, asset-backed finance will generally work with a relatively low interest rate – perhaps less than half of the rate you’ll see with an unsecured loan.
Leverage the benefits of cleared funds
The constant receipt of cleared funds is the ‘holy grail’ of every business, but few companies are in a position to have cleared funds as their basic commercial model. One exception is in the retail sector, where, apart from cash, a high volume of transactions are conducted via Point-of-Sale (POS) card payment systems. These then give a fully-receipted history of transactions, all of which represent sums due to the store from the various card providers (less handler commission). This chain of cleared funds can be used as a highly effective platform for obtaining an unsecured cash loan. The lender will generally look at the last six months’ history of POS receipts and then advance a sum equivalent to a multiple of between five to eight times their aggregate value. This is an unsecured loan and doesn’t require asset-backed mortgaging or personal guarantees from owners or directors.
One advantage with this model is that it is automatically geared according to income – so the lender will not typically need to spend a long time assessing cashflow and repayment credentials from company accounting records. However, keep in mind that this is still in principle an unsecured loan and the interest rate will reflect that added risk on the part of the lender.
The Point-of-Sale loan is a relatively new financial instrument. It can be a terrifically effective and simple means for businesses with a high percentage of cleared POS funds to obtain significant cash funds.
Credit card packages for your business
One of the challenges affecting business owners – especially in the ‘mid-term’ development of a business, when it may be moving to larger offices, or incurring costs for new equipment – is that there’s often no immediate way to afford large capital outlay. This is where a company credit card can be immensely practical and useful tool, not only by giving you a relatively high credit limit (sums of around AED500k are not uncommon) but enabling you to spread the payments of equipment over a comfortable repayment schedule. This also has the advantage that you physically own the goods in question (so they are tangible assets), since you haven’t bought them via a finance plan.
Another advantage is that while many businesses find it extremely hard to monitor and control company spending by senior staff, a company credit card – with an agreed staff distribution – can become a powerful management tool, clearly documenting expenditure while facilitating necessary payments for travel, business hospitality, etc. A further benefit is that while a corporate Visa card, for example, can offer a business exceptional spending power, its repayment policies and rates of interest are very much in line with what most consumers are already familiar with from their personal card accounts.
A comprehensive finance strategy
The finance approaches outlined above all offer businesses considerable ‘competitive edge’ in terms of their ability to make strong progress and not be hindered by the financial roadblocks that might otherwise stall development. This can be a major advantage in a hotly-contested sector where critical price or quality advantage can be offered to customers due to better equipment or facilities. Indeed, it will often be the company with the best and most comprehensive strategy for deploying a prudent selection of the above techniques that can leverage maximum benefit and crucial market opportunity.
Factfile: A focus on NBAD Commercial Banking solutions*
• Unsecured cash loan (no collateral)
• Maximum limit – AED 3,000,000 (conditions apply)
• Financing commercial vehicles; construction equipment; medical equipment; printing machines
• Maximum loan amount – AED 30,000,000
Point-of-Sale (POS) Loan
• Maximum limit – AED 1,000,000
Business Visa Credit Card
• Maximum limit – AED 500,000
• Interest rate – 2.25 per cent per month
• Cash advance interest rate – 3 per cent per month
*Terms and conditions apply
Rushika Bhatia Editor
Rushika Bhatia is one of the region’s leading commentators on business and current affairs issues. She is the Editor of SME Advisor magazine - the flagship title of CPI Business. She is passionate about infographics – with special emphasis on data, research and statistics. Rushika has a Bachelor’s Degree from Indiana University, USA and is also CIMA qualified.