In our latest City A.M feature, Andy Davies, LDF Sales Director comments on the challenges that many businesses face when looking to finance growth.
If a business has the right product or idea, whatever the uncertainties resulting from the Brexit vote, it’s as good a time to grow as any.
But there are some very significant challenges that come with hiring more staff, entering new markets, taking on new customers, or launching a new product or service – not least in terms of financing that expansion.
First, there’s the typical nature of the growth for smaller companies. While a small business might be able to secure a larger overdraft from their bank to ensure that it doesn’t run out of cash in the short term, obtaining a bank loan to fund expansion is much harder. That’s because the costs associated with growth are not necessarily “tangible”, like spending an agreed invoiceable amount on new IT equipment, vehicles or machinery.
The problem is that traditional lenders are far less willing to advance money for the small “intangible” costs associated with growth – for recruitment fees, marketing, training staff, or customer acquisition, each of which may cost just a few thousand pounds – even if the cumulative amount required is a substantial sum. Many successful small businesses therefore find themselves in a difficult position: profitable and with great growth potential, but unable to access the funds needed to maintain a healthy cash flow during expansion.
One option is to approach an alternative finance provider offering business development loans. These typically allow a business to borrow a certain amount of money to cover a variety of much smaller expenses. The process is usually very simple: coupled with providing standard financial information, the company will be asked why they are spending the money, what impact it’s going to have, where they’re going to see how to overcome the challenges of financing growth and returns, and the different costs associated with each of these things.}
Ensuring the business has a strong and enduring relationship with the business funder is a second challenge. Ironically, one of the risks of growth is that it is too successful and leaves the firm short of cash. The business might have received orders that it needs to fulfil but which it lacks the necessary cash to support. Taking on more staff will lead to an immediate increase in the wage bill but the pay-off may take some time to materialise. It’s perverse, but growth and success does have a massive impact on cash flow.
"Traditional lenders are less willing to advance
money for small “intangible” costs"
Being able to go back to your finance provider to ask for additional support is therefore extremely important, especially if they can provide you with finance to smooth cash flow in the short term. This can be particularly useful for costs like corporation tax or VAT payments.
Growth comes with countless challenges for companies of all sizes, from finding the right staff and scaling production, to navigating employment regulations and determining the most profitable new markets. But for small businesses in particular, having a decent relationship with the right financing partner will ensure that the growth journey goes as smoothly as possible.