Bizstartup.ie - Biz Centre

Finance for business comes in three different forms – equity, grants and bank finance. Before approaching the bank, first investigate the other forms of finance – grants and financial supports – available to you. Once you have organised either a grant and/or equity, you are more likely to be successful with any application to your bank.

For start-up businesses, there is a rough rule of thumb for finance. It suggests the optimum finance mix for getting your business off the ground is one third equity, one third grant funding and one third bank finance. However, it is becoming more common that instead of grant aid, support agencies seek an equity stake in new businesses.

Equity is money invested in your business by you or by others (friends, family, business contacts, venture capitalists, etc) in return for shares. It has no cost other than spreading the ownership, and possibly the control, over more parties. If outside investment is being considered, you should have a written agreement drawn up, with the help of professional advice. Banks generally like to see business promoters investing their own money in their business. It shows their commitment to the business and reduces the overall level of bank debt needed to kick-start the business and to facilitate future growth.

Grant assistance may be available to fund part of the cost of feasibility studies or capital expenditure. Employment grants may also be available for each newly created full-time job. Talk to your local Enterprise Board and your local FÁS office. A quick call can save you time and energy, and accelerate your plans.

Getting bank finance is essentially a selling exercise – you need to sell the concept of your business idea to the bank. Banks will assess the level of risk of your proposal and need to satisfy themselves that the potential rewards match the risk – ultimately, does your proposed business venture have the capacity to repay the debt?

Types of bank finance include:

Overdrafts

Every business needs access to cash over and above its natural cash flow from time to time. A business overdraft gives your business the flexibility to manage short-term cashflow needs without having to arrange a new credit facility every time.

How a business overdraft works

• Access to cash
  A business overdraft allows your business current account to go into an overdrawn position, up to a pre-agreed limit
• Competitive
  Interest on a business overdraft is variable and charged quarterly but is calculated daily. This means that you only pay interest on your daily, overdrawn balance.

Benefits of a business overdraft

• Flexible finance
  A business overdraft gives you the flexibility and peace of mind of having extra cash available outside your company's normal cash flow. It is versatile and easy to use, allowing you to better manage your working capital and prepare for one-off or unexpected spending without having to look for a new credit facility every time.
• Low-cost finance
  With a business overdraft you only pay interest on the money you actually borrow with interest calculated on your daily, overdrawn balance.

Business loans

Most businesses require a loan at some stage of their development, whether it is to start up, expand, acquire another business or purchase a premises or other fixed asset.

How a business loan works:

• With some banks you can decide on either fixed or variable interest rates
• A fixed rate will give your business protection from interest rate fluctuations and allow you to forecast your repayments and cash flow more accurately
• A variable rate will mean that any movement up or down in the interest rate may impact your repayments
• You may negotiate the postponement of the repayment of the capital amount, ie pay the interest only, for a period, to better suit your cash flow requirements. Note: This repayment option will impact on the amount and/or term of the loan
• Depending on the financial institution, you can negotiate the term of your loan over a set number of years, to suit your business's circumstances
• You can negotiate the repayment frequency of the loan, ie every month, every quarter, etc
• Foreign-currency loans are available
• Security may be required for business loans
• Each case is judged on its own merits.

Benefits of a business loan

• A flexible, versatile and easy to use source of finance
• May be tailored to suit your business needs
• Offers flexible repayment arrangements, giving your business the chance to accurately forecast its cash flow
• Allows you to invest into your business while controlling the effect this has on your cash flow
• With repayments spread out over the life of the loan, you may minimise the effects any purchases will have on your liquidity
• Allows you to leave other credit facilities such as overdrafts free for working capital requirements
• Allows you to make purchases that will appear as an asset on your balance sheet and so increase your company's asset base without having to put a large one-off dent in your cash flow
• You can enjoy the advantage of being a 'cash' buyer when negotiating with your supplier.

Asset Finance

Whether you're a small-to-medium sized business, a farmer or a large company, most banks can offer an Asset Finance package to suit your needs. The following finance packages are examples of what is available. These consist of a range of practical and tax-efficient ways in which business customers can get the finance that best suits their needs.

• Equipment Finance – available for a wide range of purposes including, industrial, printing, computers, textile machinery, communications, office, medical/dental, woodworking, shop fitting, catering and farm/fishing/forestry
• Plant Finance – available for cranes, earthmoving and quarrying machinery, warehouse or construction plant
• Heavy Goods Vehicle Finance - available for articulated, rigid and tipper trucks, trailers, container units, coaches and buses
• Vehicle Finance – flexible finance and leasing options available for new and used cars and vans, including new category B commercial vehicles, 4x4 vehicles and pick-up trucks.

Business Purchase Plan (Hire Purchase)

This allows you to borrow money over a fixed period of up to five years. The asset becomes your property when you have paid the final instalment due under the agreement. The interest rate for a hire purchase agreement is normally fixed for the term of the agreement.

Features:

• Fixed rate of interest for the full term makes it easier to manage your cash flow
• VAT may be reclaimed on the purchase price if you are VAT registered*
• Capital allowance costs may also be claimed*
• Interest charges may be offset against taxable profits*
• If financing equipment, plant, agri, or a heavy or light commercial vehicle, it is shown as an asset on your balance sheet.

Business Lease Plan

The asset is leased to you at a fixed monthly rental for a fixed term. The finance provider owns the asset and charges you for its use.

Features:

• Up to 100% finance available
• Initial capital outlay is minimised
• Rental payment fixed for the full term
• Leasing rentals may qualify for tax deductions*.

* Customers are advised that they should seek independent tax advice when considering this product.

Flexible finance for all your business needs

Also available is two short-term finance products, Insurance Premium Finance and Prompt Pay (ie for Business Preliminary Tax, Pension Contributions, Commercial Property rates) which enable you to spread the cost of any large annual payments up to a period of 12 months, therefore improving your business’s cash flow.

Invoice Discounting

Many businesses suffer from slow or late payment of invoices. Invoice Discounting is a quick solution to your working capital needs, providing a totally confidential debt-financing facility. With Invoice Discounting, we can help your business overcome cash flow problems by giving you immediate access of up to 80% of invoiced debt without affecting your relationship with your customers. While Invoice Discounting is primarily a working capital facility, it may also be used to fund transactions such as mergers, acquisitions, management buy-outs, management buy-ins and capital expenditure programmes.

How Invoice Discounting works:

Easy to operate

Simply invoice your debtors as normal and advise your bank of the sales details, via a secure internet site, on a daily, weekly or an agreed basis. If you don't need the funds straight away, you are only charged for funds as you use them. When you collect the payments from debtors, simply lodge them with your bank.

Companies with efficient systems easily accommodate your bank’s requirements in the normal course of business. The main requirements are:

• Details of the new sales raised (in bulk)
• Monthly debtor aged analysis highlighting problem accounts, disputes, etc
• Monthly reconciliation of your sales ledger with your banks summary of sales ledger.

Benefits of Invoice Discounting

Designed to solve your cash flow problems

• Converts sales into cash
• Can release more funds than conventional sources of finance
• The availability of finance grows in line with the growth in sales
• Advantage can be taken of cash and bulk discounts from suppliers
• Suppliers can be paid promptly improving a company's payment reputation
• Allows you to expand your business and increase profits without the need to increase levels of capital investment

Confidential

Your relationship with debtors is not affected, as the invoice discounting arrangement is not disclosed and remains confidential, so debtors are unaware of the funding facility.

Qualifying Criteria

Invoice Discounting is suitable for:

• SMEs and larger customers with an average ongoing funding requirement of €100,000 or more
• Businesses that sell goods or services on credit to other businesses
• Businesses that invoice after goods/services are delivered
• Businesses that have a satisfactory quality and spread of debtors
• Businesses that are competently managed with efficient sales administration and credit management systems and an acceptable sales ledger accounting system
• Businesses that are profitable and have a positive tangible net worth.

Examples of Unsuitable Debts include

• Debts that are regarded as cash sales
• Sales to individuals
• Sales of goods or services delivered on a phased or contractual basis
• Invoicing in advance of delivery of goods or services.

Take a little time to consider all the sources and seek careful advice as to the most suitable mix for your particular business idea.

This article appears courtesy of AIB.

This article © copyright Allied Irish Banks, p.l.c. 2010. The information does not constitute tax, legal, investment or any other advice by AIB. No representations or warranties are made as to the reliability, accuracy or completeness of the information.