Cash on demand
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Say you need some cash to develop your business—where do you go? Is the traditional bank loan the best source of funds? Karen Miles describes some alternatives, and highlights one or two pitfalls to beware of...
At last its the banks' turn to worry about what is happening to their businesses. Hauliers who have suffered at the hands of seemingly illogical bank managers might be excused for a lack of sympathy.
According to Dunn & Bradstreet, business account holders are increasingly straying from the tradition route of borrowing from their banks when they need money to develop their companies. The business information service puts this down to an inviting array of other sources of business finance which have matured and become fully available, as well as a tendency for companies not to want to be beholden to their banks". Hauliers are aware that the available range of finance sources has grown. But that array is complicated and confusing with each option carrying its own set of advantages and disadvantages for individual businesses at different times.
Advice centres
According to the Department of Trade and Industry-backed Business Link network of business advice centres, these complexities are perceived throughout UK firms, A recent Business Link survey of those running the country's fastest-growing small and medium-sized businesses showed that finding new finance is the most significant factor holding back company growth.
Traditionally, hauliers have perceived it as itnportant and comforting to own their own vehicles, trailers and depots, Lloyds Bowmaker, the finance house which runs the Road Haulage Association's Financial Services arm, conducted a survey at the end of last year of about 200 operators owning between four and six vehicles. It showed that up to 65% used hire purchase as a method of acquiring their vehicles and trailers—a method which ultimately brings the asset's ownership to the haulier. Another 20% used savings or their bank overdraft to purchase their trucks.
The 'it's all mine, mine, mine" instinct grows weaker, but is still prevalent, as fleet sizes grow and where hauliers are able to employ someone, such as a finance director, who is dedicated to running the company's money.
But are hauliers right to want to own so many of their assets outright when there are so many other methods of raising finance available?
Brian Fish, a director at transport adviser DFF International, believes there is no simple answer. Buying assets may he a good option for a haulier at one point but not at another time.
Cheapest option "You cannot say such-and-such is the best or cheapest option. It is vital to look at the range of options available for raising finance each time an investment is needed. The answer is unlikely to be the same every time," says Fish.
Fish, backed up by accountants, argues generally that the cheapest way of raising cash is to use a firm's already-saved funds. "The remaining options involve someone else making a profit out of the transaction," he points out.
But using the firm's cash is only the best option if the business can afford it without putting itself under strain as the overall cost of leasing a vehicle, trailer or computer is generally only marginally more expensive, accountants say. As Fish puts it "There is no point in paying cash for an asset if the firm has barely enough in the bank to buy the next load of diesel."
Savings The disadvantage of using savings for a purchase is that a haulier will have used up resources which could have bailed it out if business takes a downturn. Using up all a firm's savings will also make it less easy to invest again if no further savings are recouped—banks generally want to see a company putting half of the money towards an asset before they agree to match it with the other half.
But as one accountant says: "Whatever happens, if a new asset will earn more money than it will cost and the operator thinks it makes financial sense to go ahead then it probably doesn't matter that much which form of business finance is used. The most important thing is to get the asset on board and earning a profit." The use of a bank overdraft as a form of finance is flexible and easy, providing the bank's spending limit is not exceeded. If the haulier suddenly becomes flush with business it can pay off the overdraft. And the same can be said of a well-negotiated formal bank loan. However, a large overdraft leaves a haulier open to the most damaging aspect of a bank's power. The bank may want personal guarantees from the company's directors, leaving their homes in jeopardy, and it can call in an overdraft suddenly, threatening the company with collapse or receivership.
BANK OVERDRAFT
"Business angels" are a common source of finance in the haulage sector, for example a friend met in the pub or a family member giving cash to the business for new investment in training, computers, premises or vehicles in return for a shareholding and regular dividends. These relationships have the advantage of being as formal or informal as the parties want. Generally, larger sums of money can be obtained through the formal channels of employing a venture capitalist. The use of a business angel is cheaper than borrowing and their cash is not shown as a liability on the haulier's balance sheet—a technical help if the company wants to encourage further funds from other sources in the future. But the haulier must be sure they can get on with the new investor—few circumstances are worse than having to deal with disgruntled shareholders—and they should guard against giving away more than 50% of the shareholding to others, which would mean a loss of control.
BUSINESS ANGELS
Venture capitalists—the most well-known is 3i—are usually more expensive than less formal liaisons and provide risk money in exchange for unsecured shares, and sometimes a non-executive board position. Unlike banks they share in the business' rewards if the company peforms well and lose out if it fails. Venture capitalists will usually want to sell their investment after three to eight years so haulage management must prepare for the day when the venture capitalist wants its money back—and its average 25% profit.
VENTURE CAPITALISTS
Hire purchase is a traditionally popular method of finance for hauliers, whether it be for trucks and trailers or office equipment. HP can be flexible, with hauliers paying different amounts each month according to the seasonality of their business, as well as accelerated or decelerated payments. Wien the final payment is made the asset legally belongs to the haulier.
However, HP can be a financially painful contract to withdraw from before the end of its arranged term, Any asset acquired on HP must also be declared on the haulier's balance sheet as both an asset and liability, making the company financially less interesting to any future potential lender or investor, HIRE PURCHASE
The use of leasing as a form of finance rules out that problem because a leased office, computer or vehicle is invisible on the balance sheet. But this is because the asset will never be owned by the haulier—all they have to look forward to is years of continuous payments, with no ownership in sight. A leased asset also brings immediate tax relief so that less tax is generally paid in the first few years than if the same asset was bought outright. Hauliers can also look to sell and lease back schemes as a form of finance. These schemes involve the haulier selling an asset—such as a vehicle, an office, or a piece of land—to a leasing company Which will then charge the haulier regular, fixed sums for its leased use. Depending on the circumstances, sell and lease-back schemes can be seen as a last-ditch attempt by a desperado to stay in business or a canny piece of financial footwork by an operator which frees up thousands, or even hundreds of thousands, of pounds.
LEASING Factor invoicing provides another—although controversial—form of business finance. Factoring is the arrangement where a finance house agrees to pay a percentage immediately—normally between 70% and 80%—of an invoice raised by a haulier. The remainder, less commission, will be paid at a later date. Improved cash flow should allow the haulier to reduce their overdraft and borrow again, if they wish. But insolvency experts believe factoring can cost hauliers around 5% above the normal bank rate and factor companies can refuse to honour invoices which are left unpaid by customers. (See also CM 24-30 April.) FACTORING
There are ways and means of hauliers receiving cash grants from local authorities, the government and the European Union, but these are notoriously tortuous to obtain. Operators should seek advice from their local council, Chambers of Commerce, the DE in London or that department via a local Business Link office, or their accountant.
GOVERNMENT GRANTS