Technology has become increasingly important for accountants and bookkeepers in the last few years, and that trend is only going to continue.
Accounting software like Clear Books has become the new standard, because it makes life a lot simpler by removing manual processes.
But there are two sides to this coin — as software becomes more sophisticated, the role of accounting professionals is changing, and clients expect more value-adding services. Business finance is one of the key things that business owners will ask their accountants and bookkeepers about, particularly in the varied world of alternative finance.
With just a bit of knowledge on the topic, you can equip yourself to confidently advise your clients on their finance needs.
Remember, every business is different
Finance professionals will tend to look at the pennies and pounds involved in the search for finance, perhaps prioritising interest rates over everything else.
While this is definitely part of the job, there’s more to business finance than just the interest rate, and it might be better to start by considering the specific circumstances of your client’s business. For example, you might be thinking about a fixed loan and have a benchmark interest rate in mind — but what about flexible products like revolving credit facilities?
These will often have higher headline interest rates, but work out cheaper in practice because you can use them as and when they’re needed. In other words, the annual percentage rate isn’t as relevant if the interest isn’t always running.
Another aspect you should be thinking about is how your client’s business is structured.
There are various products on the market designed for firms that invoice their customers, companies that take card machine payments, businesses that want to pay overseas suppliers, and even firms that want to pay a tax bill. These types of product will often be a better fit than an off-the-shelf business loan.
That’s not to say that the latter isn’t worth exploring, just that it often makes sense to opt for the most tailor-made product for your client’s situation.
Affordability and turnover
Many lenders assess affordability by looking at turnover versus the loan amount. Generally speaking, for a fixed loan you normally can’t borrow more than 10–25% of annual turnover.
Other factors play into this too — for example, all things being equal, a longer term will reduce the monthly payment while increasing the total cost of finance — but turnover is a good way to get a rough idea of what your client can afford.
Lots of the lenders on the market will want to see at least two years of trading history, so if your client has been trading for less than that you might find your options are somewhat limited.
However, for certain products the trading history is less important, and some lenders are willing to look at businesses trading for 18 months or fewer, so it’s worth looking at the specific criteria once you’ve identified a suitable product. For example, a recent customer of ours had only been trading for a few months, and wanted finance to fulfil a big order.
Because this order was from a large high-street retailer, the lender was willing to offer finance even though the business itself was quite new — because having a large, credible customer makes it a much less risky proposition. In other cases, finance will be secured against specific assets.
This is known as secured lending, and will often reduce the importance of the business’s trading history because the lender knows they can sell the asset if the worst comes to the worst.
Homeowners and personal guarantees
We’ve touched on secured and unsecured lending, and one important thing to know about unsecured business loans is that they’ll almost always require a personal guarantee (or PG for short).
While this is not the same thing as securing lending against a specific asset, it does mean the business owner is agreeing to repay the lender if their business is unable to do so. For this reason, lenders offering unsecured products will ask about homeowner status.
While this is partly to find out more about the director’s net worth, it is also important for due diligence reasons. Anyone with a mortgage knows that there’s a long list of checks to satisfy, and business lenders ask whether you’re a homeowner because it can speed up the due diligence process.
Giving a personal guarantee isn’t the same as borrowing against the value of your home, but it does mean you’re personally liable if your business can’t repay the loan. For this reason, you should think carefully before giving your personal guarantee, and speak to a lawyer before signing anything.
Perhaps one of the simplest ways you can help your clients apply for business finance is by helping them prepare all the documents.
Each lender will have slightly different requirements, but almost everyone will want to see the last three to six months of business bank statements. For limited companies, it’s also really useful to have your latest set of filed accounts ready, and any other financial statements such as profit and loss.
All of these are things that accountants and bookkeepers are well-placed to help with — and if you’re using Clear Books already, you can make sure all your financials are neat and tidy and get ahead of the game.
The key thing to remember is that with the right documents prepared in advance, it’s possible to get a business loan within hours of applying — while some of the biggest delays in an application often come from businesses not having their documents in order.
Final thoughts on business financing
With so many products and lenders on the market, it can be hard to know where to start with business finance. Hopefully these tips give you a few things to think about, and will give you more confidence in advising your clients on business finance.
Conrad Ford is Chief Executive of Funding Options, recently described by The Telegraph as “the matchmaking website for small businesses and lenders”. Funding Options has been selected by HM Treasury to help businesses find finance when they’re unsuccessful with the major banks, as part of the Bank Referral Scheme that launched in November 2016. @FundingOptions