Indeed, for the vast majority of businesses, it is impossible to make large-scale plans for growth without the possibility of generating investment. All companies would like to be in a position to fund their growth via their success, but typically most of the day-to-day cash flow is tied up. So, even if you are running a profitable business it is not always easy to get your hands on the extra cash when you need it.
Of course, in other situations, it may be that a lack of cash flow is actually holding the business back and that an injection of extra funds could help to stabilise finances. And, just as there are a number of reasons that you might need to raise capital, there is a multitude of options when it comes to raising funds. In this article, we take a look at some of the ways companies can build up their cash reserves.
Businesses have a lot of potential options to choose between when raising money, however, in general, most fall into type fundamental categories: borrowing money that you will pay back later, or selling shares in the company.
This is oversimplifying the issue and, in both cases, there is a very varied range of possibilities and choosing the right one can depend on a number of factors:
Below we will discuss the main options available to you, including examining what could work best in your specific circumstances.
In many ways, borrowing money is the simpler of the two categories of raising capital. You will receive the money you need and then you will need to pay back that money over a fixed period, and usually with a rate of interest. Some of the money borrowing options include:
This won’t be the right choice for everyone, however, if your business is small and the cash injection that you need isn’t too significant, you may find that you can actually simply borrow the money from friends and family. This kind of casual arrangement will generally be cheaper for you, as those close to you may not charge you interest.
Of course, it is important to weigh up very carefully whether you want to risk the money of your friends and family. If you find yourself in a position where you can’t pay it back, it can have a negative effect on your personal life as well as your professional life.
Perhaps the most traditional way of raising funds, bank loans can be a quick and effective way to get the money you need. The majority of high street banks offer loans to businesses, and these can be anywhere from £1,000 to £50,000.
As with any bank loan, you will need to prove that you will be able to pay the loan back, which will generally involve having a high-quality business plan. Let the bank know about any assets you are going to be purchasing with the money, as this can strengthen the application.
Becoming more popular, peer-to-peer (P2P) finance involves matching up a number of smaller-scale investors with small businesses. Your business applies for a loan of between £1,000 and £1 million, and the money is drawn from a pool of investors. This type of funding is typically easier to apply for than a bank loan.
One other option, known as invoice finance, is a business lending model that companies will use as a way of resolving their cash flow issues. Invoice finance enables companies to raise funds required by borrowing money against issues they have already issued.
The other major option is selling shares in your business to get the money you need. There are actually many ways to go about this, so let’s take a look at which option might be right for you.
Seed Enterprise Investment Scheme (SEIS) is a government scheme that encourages investors to put money into smaller businesses. It does this by providing an income tax break to individual investors buying SEIS-qualified shares.
Investors can claim against income tax or capital gains tax, and the companies can get up to £150,000 worth of investment via SEIS shares - so this can be a win-win for investors and businesses.
Angel investors are usually high-net-worth individuals looking to make investments in businesses. They can offer significant amounts of money and this will generally be in return for a large portion of the business. An angel investor may be interested in making decisions about the direction of the business, so a big part of getting this investment can be finding the right individual to work with.
About the author: Annie Button is a professional content writer and branding aficionado.
There is no shame in taking out a loan and often it is the best solution to a financial challenge, but debt can very quickly spiral out of control and can be a slippery slope if you do not know how to manage your loans. This article will look at a few of the best ways that you can manage your loans to prevent spiralling into debt.
People often default on loans or run into financial difficulties because they are not organised. You need to sit down and go through all of your loans and what interest you are paying so that you can work out exactly what your financial obligations are each month. If you use a pawnbroker, for example, then you need to understand your loan and work out exactly how much you are paying back monthly and for how long.
You also need to spend time looking through the contract of the loan (you should always do this before signing anything as well). This is so that you can get a stronger understanding of the agreement, including how long it is for and if you are able to clear the debt sooner. This will help you to avoid any nasty surprises and allow you to adjust your household budget so that you can manage during the course of the loan.
It might seem obvious, but many people do not make their payments each month for one reason or another and this is when you start to fall into dangerous territory. It is smart to set up automated payments so that the money will automatically be paid each month, which means that you do not have to remember and complete a manual payment each month - just make sure that you will always have enough money in your account. You should also look into what the implications of paying late are as every lender will have different terms and conditions. If you are ever struggling, you should always let your lenders know as they may be able to restructure the agreement.
Loans can be a great solution to financial challenges, but they can also lead to even greater financial challenges and debt if you are not careful. The key is to know how to manage your loans so that you can stay on top of payments, adjust your household budget and pay back the loan in full and on time. When you are able to do this, loans can be incredibly useful and a smart solution to financial challenges.
Marketing tactics such as these are enough to lure the average person into the trap of getting external financing. Then they enter a life-long rat race to try and repay their loans because they have bitten off more than they can chew. Here are a few tips to help you stay clear of these problems and use a loan as effectively as possible.
One of the main problems people face with loans is the price of the loan itself. There are two things that you need to check in this regard. The first is the interest rate on the loan and the second is the service cost of the loan. The interest rate is relatively easy to calculate and understand. Still, it is the service fee that often takes people by surprise. Most lenders are not very transparent about the costs associated with getting their financial products. After you have bought it, you realise that it will cost more than you expected. Make sure you go through the fine print with the salesperson and understand what you will need to pay for exactly.
Before you sign up for a financial product, understand your needs and the different products available. Rather than getting a generic loan, you may be better off getting a specialised product intended for your needs. If you need financing for a home, a real estate loan will be a better option than a generic loan. Similarly, you could apply for a business investment loan if you have a business. These specialised loans give you better choices and better prices.
Your credit score plays a pivotal role in how easily you will be able to get a loan and how cheap that loan will be. Just because a loan is advertised with affordable rates doesn't mean it will be reasonable for you. A poor credit score could make the loan more expensive because you are a riskier investment for the lender. If your credit score is holding you back from getting a good loan, your best option might be to wait until your score improves a little bit. This way, you may become eligible for other loans, and you will also get a better price on those loans.
Loan repayments include repaying the interest rate and the principal amount. They are two completely separate things, and different lenders will structure their repayment plans differently. Make sure you understand your repayment policy and select something that doesn’t have compounding interest. This will help to keep the loan cost low and make repayment as easy as possible. Make sure you are comfortable with the repayment terms before signing up.
Different lenders will offer the same kind of loan. You could get financing from a bank, a private investment company, an insurance provider, or even the government. Different lenders will have drastically different rates and conditions for a loan of the same value. If you can’t find a suitable option through banks, look into other options. Generally, you will get the most lenient terms through organisations that are backed by a local or federal government.
People tend to require loans when they need a problem solved. The thing to consider is whether the loan cost will justify the value that you will get from using that money. If the risk and the price of a loan are higher than the value you will get, it might not be such a wise decision, no matter how profitable it might seem right now. Long-term loans can last years, even decades, and things can drastically change during that time. Consider the long-term value of using that money and whether it will be worth it, considering how the cost of the loan will increase over time.
Whenever you attempt to secure a loan, make sure you have plenty of time on your hands. Lenders capitalise on the urgency customers express and in their haste, they end up making poor decisions. Give yourself a couple of months to explore the different options and shortlist good options. Moreover, consult with the various service providers and take your time to understand the loan. Just because you are discussing an option with a company doesn't mean you have to decide right there and then. A well-thought-out decision could make your future.
Foreclosure is the process of a lender taking back possession of a property from the borrower after the latter has failed to make payments on their loan. The foreclosure process usually starts when borrowers fall behind on their monthly mortgage payments but can also happen if they default on other types of loans such as car loans or home equity lines of credit. There are various options for avoiding foreclosure to keep in mind that will help you stay in your home. In most cases, lenders will start the foreclosure process after the borrower misses three or more consecutive payments. Once the foreclosure process begins, it can take a few months to a year for the lender to take possession of the property.
There are two main types of foreclosure: judicial and non-judicial.
The foreclosure process generally works like this:
A pre-foreclosure is a notice that the lender has filed with the court stating that the borrower has missed one or more payments and is in danger of being foreclosed on. The pre-foreclosure period gives the borrower an opportunity to catch up on their payments and avoid foreclosure. If the borrower doesn't make their payments during this time, the property will be auctioned off and they will be evicted. For example, if the borrower owes $100,000 on their loan and the property is worth $90,000, the lender may file a notice of sale with the court. This would start the foreclosure process and the borrower would have around 30 days to catch up on their payments. If they don't, the property will be auctioned off and they will be responsible for any unpaid balance on the loan.
After foreclosure, the borrower is responsible for any unpaid balance on the loan. The lender may also pursue a deficiency judgment against the borrower if the property is sold for less than what is owed on the loan. For example, if the borrower owes $100,000 on their loan and the property is sold at auction for $90,000, the borrower would be responsible for the remaining $10,000. The lender may also report the foreclosure to the credit bureaus, which will damage the borrower's credit score. A foreclosure can have a major impact on your life, both in the short and long term. In the short term, you will lose your home and may have to move. You may also have difficulty renting or buying another property because of the foreclosure on your credit report. In the long term, a foreclosure can damage your credit score and make it difficult to get a loan in the future.
There are some ways you can avoid foreclosure. These include:
Foreclosure can be a stressful and difficult process, but there are options for avoiding it. If you're struggling to make your monthly payments, talk to your lender about your options. They may be willing to work with you to avoid foreclosure. So, at the end of the day, you'll be able to look back on this and know that you handled it in the best way possible. By considering your options and talking to your lender, you can avoid foreclosure and keep your home.
Development finance is a specialist type of secured loan, issued for the purpose of constructing, converting, renovating and repurposing properties. It is a strictly short-term facility, designed to be repaid within around 18 months of the issue date. Like most types of specialist commercial loans and development loans, development finance is typically granted exclusively to experienced developers and construction companies.
Development finance differs from a conventional mortgage in that the lender takes into account the estimated value of the completed property - not just the value for the development at the time the loan is issued.
A brief overview of how development finance works:
Development finance is used by experienced developers and construction companies, who would prefer not to invest too much of their own capital in their projects.
By covering anything from 75% to 100% (with mezzanine funding) of a project’s costs, developers have the opportunity to run multiple projects simultaneously. This would not be possible if they invested all of their own capital in any given project, making development finance their preferred choice.
Documentation requirements vary in accordance with the nature and extent of the funding required. However, most development finance specialists will expect to see the following as the bare minimum:
Your broker will advise on all the necessary paperwork to submit your application, during your initial consultation.
It is technically possible to qualify for development finance with bad credit, but you are unlikely to qualify for lenders’ most competitive deals. If you are concerned about your credit score (or general financial background), it is essential to consult with an independent broker to discuss the alternatives to development finance. A subprime product from a specialist lender could prove more affordable, depending on the type of property development project you have in mind.
“The figures reported directly to Loans Warehouse from second charge lenders confirm lending totalled £155.5 million in March 2022, a new post-credit crunch record and a continuation of the huge growth being seen in second charge lending over the last six months,” explained Loans Warehouse managing director, Matt Tristram.
Second charge transaction volumes for March increased by almost 12.5% from the previous month, breaking all records set since the credit crunch. A total of 3,237 loans were issued in March, topping November’s previous record high of 3,036.
Average completion times came out at 22 days - largely unchanged from the previous month.
Consolidation continues to top the table as the most popular use for second charge loans, accounting for just over 39% of all loans issued. This was closely followed by joint consolidation and home improvement purposes (37.2%), and home improvements (16%).
The figures also indicate that the average term on a second charge loan for March was 21.8 years, but there has also been a major uptake in the number of short term bridging loans issued.
In terms of types of loans, consolidation accounted for 39.3%; consolidation and home improvements for 37.2%; and home improvements for 16%. The average term was 21.8 years.
The report also showed that almost 85% of second charge loans were completed at below 85% LTV; the remaining 15% at above 85% LTV.
“One of the biggest impacts on mortgage lending during the pandemic has been on the level of equity available to borrowers,” added Tristam.
“Second charge lending continues to offer an alternative method of raising capital for many, as such we will have highlighted the split of lending over 85% LTV.”
The short-term bridging sector has likewise recorded a monumental performance during the first quarter of 2022, achieving a total combined transaction value of £156.78 million - a major increase of 8.5% compared to the same period last year.
As it becomes increasingly difficult to qualify for affordable finance on the High Street, businesses and households alike are setting their sights on alternative options from specialist lenders.
For 16 months in a row, the most popular use for bridging finance has been purchasing investment properties, followed by speeding up the property purchase process and mitigating the risk of a chain break scenario.
“It comes as no surprise that bridging loan transactions have increased again from the previous quarter – the property market continues to be turbulent for a variety of well-publicised reasons so borrowers are looking for increasingly innovative ways to structure their debt,” said Head of Corporate Partnerships at Sirius Property Finance, Kimberley Gates.
“The stigma surrounding bridging also continues to subside as more investors, developers and homeowners are starting to see it as a useful tool for realising their real estate goals and no longer as a last resort.”
In an emergency, you may need access to cash quickly. One way to get cash is to borrow it from your credit card. This can be a quick and easy way to get your money. However, there are some downsides to this method. First, you will likely be charged interest on the loan. Second, if you cannot repay the loan, you may damage your credit score. Consider all of your options before taking out a loan from your credit card. Bad credit loans may have higher interest rates and fees, but they can still be a good option if you need cash quickly and have few other options.
If you have valuable items you no longer need, you can always sell them to a pawnshop. To pawn an item, you simply take it to a pawn shop, and they will give you a loan based on the value of the item. You then have a certain amount of time to repay the loan, and if you do not, the pawnshop will keep your item. This is a good option if you have items of value that you are willing to part with for a short period.
You can sell your items online or at a local consignment shop. This is a good option if you have some items that you no longer need or want and you need cash quickly.
You can advertise your services online or in your local community, and you can often find work within a day or two. You can also control how much work you take on to decide how much money you need to earn. Pick-up jobs aren't always the most reliable source of income, but they can be a lifesaver in an emergency.
Their retirement account is one of the most valuable assets for many people. While it can be tempting to access this money in times of need, there are several things to consider before taking this step:
Emergencies can happen to anyone, and when they do, have a plan to deal with the financial stress. Hopefully, you now have a few ideas of ways to get quick cash during an emergency. Remember, it's always best to start with your savings account or checking account as your first line of defence, but if those funds are unavailable, don't hesitate to try one of these methods.
And what happens if the sale of your current home falls through at the last moment? What if the buyer you lined up suddenly has to pull out because their buyer changed their mind at the eleventh hour?
Property chains are long, complex and inherently fragile. Just a single broken link is all it takes for the whole thing to come crashing down. In an ideal world, there would be a stopgap solution available making it possible to buy your next home first and sell your previous home later; a simple and affordable way to bridge the gap between buying and selling, enabling you to opt out of the traditional property chain entirely.
This is where a short-term bridging loan can be worth its weight in gold. As the name suggests, bridging finance is used to ‘bridge’ temporary financial gaps like these. Here is how bridging finance could be used to escape a property chain, in a typical buying and selling scenario:
Bridging finance differs from conventional loans and mortgages in that it is designed specifically for these kinds of purposes. Each loan is arranged and negotiated as a bespoke facility, but will typically share the following features and benefits:
The speed and simplicity of a bridging loan make it the perfect tool for escaping the traditional property chain. Charged at a monthly rate of around 0.5%, bridging finance can be uniquely cost-effective when repaid promptly.
Even with all additional borrowing costs factored in, it all adds up to a small price to pay to prevent your dream home from slipping through your fingertips at an unbeatable price.
Development finance offers the kind of flexibility that can accommodate the vast majority of larger-scale property development, conversion and construction projects; examples of which include repurposing entire properties, partially or completely demolishing properties to be rebuilt from the ground up, or transforming the early properties into luxury multi-purpose developments.
Importantly, development finance affords developers the opportunity to cover up to 100% of the total costs of the project - without eating into their own capital. As established developers often aim to have several projects on the go at the same time, this alone can make development finance a uniquely beneficial financial tool.
The initial loan issued by a development finance specialist is referred to as ‘senior’ development finance, which is usually offered with a maximum LTV of 85%. This means that the primary loan secured against the development can be taken out to cover no more than 85% of the total project’s costs.
Another slightly different form of development finance is offered by some lenders, referred to as ‘stretched’ senior finance. This is where (under special circumstances) a lender is willing to increase this maximum LTV to around 90%, leaving just 10% of the project’s costs to be covered by the investor.
Again, property developers and investors often seek to minimise the direct investment of their own capital, in order to enable them to execute multiple projects simultaneously.
Whether the initial loan taken out is a standard senior development loan or stretched senior finance, the remaining funds do not necessarily need to be provided by the developer. There is also the option of seeking ‘mezzanine’ finance - a facility used to top up an initial development finance loan, which sits behind the first legal charge of the senior lender.
Mezzanine finance can be used to take the developer's total borrowed funds from the initial 85% or 90% right up to 100% of the project’s total costs. A mezzanine finance facility will usually be sought from a separate lender to the first product, issued as a second-charge loan against the borrower’s assets - usually the development itself.
While mezzanine finance can be affordable in terms of monthly interest and borrowing costs, it is a facility which is usually issued on the condition that the lender takes a proportion of the final profits on the development from the borrower. This is not always the case, but some mezzanine finance facilities include a clause wherein up to 50% of the developer’s profits are claimed by the lender, upon completion of the project.
This is one of many reasons why it is essential to seek independent broker support, before applying for development finance. Irrespective of your target LTV or the nature of your project, broker support always paves the way for an unbeatable deal and the flexible terms you need to successfully complete your project.
But there will always be times when turning to conventional banks for support is not the way to go. In fact, mainstream lenders can be surprisingly inflexible when a borrower’s needs cannot be met by any of their standard ‘off-the-shelf’ financial products.
In each of the following instances, in particular, it may be practically impossible to secure the financial support you need from a mainstream bank or lender.
Borrowing significant sums of money from a conventional lender typically means enduring a near-endless application and underwriting process. Average mortgage underwriting times are currently around 12 weeks, rendering time-critical purchases and investments out of the question.
By contrast, a bridging loan for purchasing a property can often be arranged within just a few working days; ideal for taking advantage of property purchase opportunities that will not be around for long.
Most of the products and services offered by banks are relatively long-term in nature. This is particularly true when it comes to loans and mortgages, where early repayment paves the way for penalties and other transaction fees.
On the specialist lending market, funds can be raised for any purpose over periods of anything from one week to several years. If you would prefer to repay your debt as quickly as possible to save money, you can do just that.
The overwhelming majority of mainstream lenders turn away applicants with poor credit at the door. Unless you have an excellent credit score, you can forget about qualifying for a mortgage, an unsecured personal loan or any other consumer credit facility.
Bridging lenders adopt a different approach, wherein applications are judged on the basis of their overall merit. Even with poor credit and/or a history of bankruptcy, it is still possible to qualify for affordable bridging finance.
Likewise, if you cannot provide formal proof of income and your current employment status, you are highly unlikely to qualify for any conventional financial product available from a mainstream lender. Irrespective of the size or nature of the facility you need, your application will not even be given fair consideration. Elsewhere, secured loans from specialist lenders can often be accessed with no proof of income required, and no evidence of employment status necessary.
The mortgages and property loans issued by mainstream banks are typically restricted to the purchase of habitable properties in a good state of repair. Purchasing rundown properties to be ‘flipped’ for profit is often out of the equation, as they are considered unmortgageable.
Consequently, property developers and investors tend to seek support from development finance specialists and commercial bridging loan providers; both of which are willing to lend against almost any type of property, irrespective of its condition at the time.
Across the UK, the popularity of bridging finance has skyrocketed over the past few years. But what is it that makes bridging finance such a popular choice among private borrowers and commercial customers alike? Moreover, what are bridging loans being used to finance by those taking them out?
When compared to standard High Streets loans and mortgages, bridging loans can be beneficial in the following ways:
As for how bridging finance is being put to use, these are the top five uses for bridging finance among private customers and business borrowers right now:
For more information on any of the above or to discuss the benefits of bridging finance in more detail, contact a member of the team at UK Property Finance today.
Building a good credit score for your business is crucial for possible future financing. Even if you start your business with your own money, there is no doubt that you will need a small business loan to take it to the next level. Therefore, learning how to build a strong business credit profile must remain at the top of your priority list if your business must thrive on external financing.
A strong credit profile not only opens doors to possible loan facilities for your business, but lucrative contracts and deals sometimes require your company to have exceptional credit scores. Nick Wilson, CEO of AdvanceSOS, recently shared six important tips that can help you boost your business credit profile. These tips are relevant whether or not your business has a credit history.
AdvanceSOS is a loan aggregator founded in 2019 by Nick Wilson, an experienced loan officer. Its easy application helps borrowers reach a huge network of direct lenders to get a 500 dollar loan at AdvanceSOS on the same day or within 24 hours.
Your credit profile consists of the credit history you have formulated over time using your social security number. They may include a chain of secured and unsecured loans such as mortgages, car loans, insurance, payday loans, credit cards, and so on.
Key components such as your payment history, duration of credit, unsettled debts, credit mix, and new loans obtained are evaluated to form your credit profile. Also, your ability to pay back these cash advances when due improves or depreciates your credit score and may affect your ability to access more credit facilities.
On the other hand, your business credit profile consists of those debt financing facilities advanced to your business and not to you as an individual. However, lenders may run a check on your credit profile when advancing business loans to small businesses.
Unlike the chain of personal loan facilities that form your credit profile, activities such as payment history of your business, financial stress score, utilised credit ratio, and other relevant data are evaluated to form your business credit profile.
If your company has no credit history and you want to start off on the right foot, you should register your company. Business registration commences your business credit profile journey. Also, after registration, you must obtain your federal tax identification number.
This is sometimes referred to as the employer’s identification number, which is quite similar to the social security number associated with an individual. You have commenced the long but interesting journey of building your business credit profile with all of these done.
You must constantly update your business information and credit history with the three important credit bureaus for businesses. Potential lenders examine the information provided to these bureaus to determine your creditworthiness.
These three credit bureaus have their own separate ways of calculating your credit score. However, the scores formulated by them determine whether your business credit profile is strong or not. It is also a good idea to keep your data up-to-date with all three bureaus. None should be your favourite because potential lenders can consult any or all of these credit bureaus.
The Dun & Bradstreet Paydex score requires that you have at least three settled trade lines, and the greater the number of settled trade lines you have, the better your score. Therefore, you can make this work in your favour by establishing an account-payable relationship with your vendor or suppliers if that is your line of trade.
This way, you take up their trade credit and settle the credit promptly and ask that your vendor report your payment history with them to the credit bureaus. This will boost your credit score tremendously. You can also approach the credit bureau yourself by lodging the payment history as a trade reference on your account.
This is a supporting tip to the third tip above. The logic behind using tradelines is to establish a narrative of creditworthiness with the credit bureaus. Therefore, you need to conduct business with suppliers and vendors that report to a credit bureau. The whole essence is not to be dodgy but as transparent as possible, and you must have this transparency reported.
It then becomes an important business question you need to ask every supplier or vendor, whether they will report your prompt payments before taking up their credit or loans. Already, banks and other financial institutions that extend loan facilities to businesses report your credit history to the credit bureau, which is why prompt settlement of debt automatically increases your credit score.
The use of credit cards and lines of credit to boost your business isn’t novel. However, what is important is that you must avoid maxing out these credit cards. You must learn how to make the most of your credit card. Essentially, never exceed your limit, and when you do, pay it back promptly. When you have credit limits, do not exceed 30% of your credit limit.
Also, do not use your credit card for business purposes. You must avoid letting your credit profile affect your business. Open a business credit card instead and ensure that the credit card company reports your history to the credit bureaus.
You may not always have your credit details at the back of your hand. It is important that you consistently monitor your business credit to ensure you have the right credit profile that attracts lenders and yields lower interest rate opportunities when seeking credit or loan facilities. Furthermore, monitoring your business credit reveals any damaging issues or fraud that may cause a dip in your credit score.
About the Author: Amanda Girard leads the financial copywriting team at AdvanceSOS. Her invaluable input and expertise translate into articles posted throughout our website and other notorious channels. Since our founding in 2019, she has written the most comprehensive yet exciting pieces for our company.