Credit for working capital?

Discussion in 'Cashflow forum' started by hazmog, Jul 16, 2017.

  1. hazmog

    hazmog UKBF Contributor Free Member

    45 2
    My business has grown rapidly in the last few months. I have more staff and upcoming VAT bills etc that I need to take care of but don't have the funds readily available. I have work set up and contracted (as in signed and 100% committed to clients) that more than covers these costs (approx 4 times as much) however a lot of these funds won't be released until after upcoming bills are due.

    I know many companies start up with a large sum of money to fall back on for things like this, but we have grown organically and rather quickly and no such funds are available. I have a small amount of credit available to me, but not enough and my bank will offer me a short term overdraft but I don't think it would be enough and it would be costly - really I need a long term arrangement where I can access funds should there be unexpected bills or a slow month in terms of cashflow over the next year or so while we continue to grow and bank up some reserves.

    Any ideas on the best way to do this? A 12 month loan? Any recommendations?
     
    Posted: Jul 16, 2017 By: hazmog Member since: Jul 4, 2017
    #1
  2. Ian J

    Ian J Factoring Specialist Full Member - Verified Business

    4,489 1,263
    Have you considered factoring?

    This will only work and release funds for jobs completed and invoiced and won't help with work in progress or orders in hand
     
    Posted: Jul 16, 2017 By: Ian J Member since: Nov 6, 2004
    #2
  3. menetworkjadaltd

    menetworkjadaltd UKBF Regular Free Member

    335 50
    You spent the VAT money?! :-(
     
    Posted: Jul 16, 2017 By: menetworkjadaltd Member since: Dec 14, 2011
    #3
  4. Scott-Copywriter

    Scott-Copywriter UKBF Legend Full Member - Verified Business

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    A 12 month loan may cover your VAT bills, but as far as having accessible funds you can tap into when needed, that's exactly what a business overdraft is for.

    I know some banks have arranged overdraft rates of 5%-6%, which is similar to what you would be able to get with most loans. In my view, little else comes close in terms of the combination of flexibility and affordability. It's made for this purpose.

    That being said, if you spent the VAT money instead of ring-fencing it, lenders may not take too kindly to that.

    If the sums are well beyond what you would be offered with an overdraft or loan, then the only other option I can see would be to bring an investor on board and sell a chunk of your business in exchange for capital funding.
     
    Posted: Jul 16, 2017 By: Scott-Copywriter Member since: May 10, 2006
    #4
  5. hazmog

    hazmog UKBF Contributor Free Member

    45 2
    Factoring - I've looked into it, I don't think it's right for us really. We aren't waiting ages for invoices to be paid, rather it sometimes takes us a while to complete the work in order to release the invoices.

    VAT - no, other bills are more of a concern, but I will admit recently being VAT registered does complicate things. Should be ok this month but in future I can see there could be slow months and would like some sort of safety net in place. I've put in for a quote with Funding Circle to see what they can offer.
     
    Posted: Jul 16, 2017 By: hazmog Member since: Jul 4, 2017
    #5
  6. hazmog

    hazmog UKBF Contributor Free Member

    45 2
    Thanks Scott-Copywriter. As above, VAT I can cover, but in the bigger picture there are other costs and need some way to smooth out the rough as we continue to grow.

    My bank did offer me an overdraft that would cover about a months payroll and rent which was a little less of a safety net than I wanted, but they explained it should be used for very short term cases only and that actually a credit card is cheaper.
     
    Posted: Jul 16, 2017 By: hazmog Member since: Jul 4, 2017
    #6
  7. Scott-Copywriter

    Scott-Copywriter UKBF Legend Full Member - Verified Business

    9,301 2,514
    Credit cards are very useful as, if you pay the balance off in full each month, you'll be charged no interest. That means you can essentially get an interest-free loan of up to 30 days if you time it right and don't carry a balance over.

    You may be better off using multiple forms of credit. An overdraft plus a credit card would allow you to spread borrowing between both. You could even opt for more than one card, but it would be wise to leave at least 6-12 months between applications (too many in a short period of time indicates financial difficulty and therefore higher risk).

    Just remember that personal credit checks on the directors of the business often occur, and it's common for them to include personal guarantees as well (particularly if you want any worthwhile limit right off the bat).
     
    Posted: Jul 16, 2017 By: Scott-Copywriter Member since: May 10, 2006
    #7
  8. hazmog

    hazmog UKBF Contributor Free Member

    45 2
    Hmm, you make a good point about credit cards. If they are paid off fairly quickly there is little to no interest.
     
    Posted: Jul 16, 2017 By: hazmog Member since: Jul 4, 2017
    #8
  9. Clinton

    Clinton UKBF Big Shot Free Member

    3,249 1,063
    You're not going to like what I have to say but ...

    Your business isn't the good credit risk you seem to think it is.

    There's, of course, the matter of the VAT money you've spent. It doesn't paint management in the best light.

    Then you state that you've got "orders and commitments". I won't venture a guess as to the "quality" of these orders, but if they were long term contracts with the likes of Local Authorities or blue chip companies, you could possibly borrow against the purchase orders. I suspect yours are not.

    Then you say you have to deliver on these orders before you get payment. And that it takes you "a while" to complete orders. Ouch!

    You're a small company (recently below the VAT threshold) and have demonstrated less than stellar money management skills. What evidence do you have that you can handle fast growth without messing everything up and falling flat on your face (and being unable to repay creditors)?

    I haven't seen your books and your business plan, but you'd probably be better off using credit cards ... if you can borrow enough on cards. Be careful though and don't overestimate your ability to pay them off!
     
    Last edited: Jul 16, 2017
    Posted: Jul 16, 2017 By: Clinton Member since: Jan 17, 2010
    #9
  10. hazmog

    hazmog UKBF Contributor Free Member

    45 2
    Thanks Clinton. As per previous comments, I have not spent the VAT, I do however have a VAT bill sooner than I thought due to an issue with my accountant that I will not go into here. Consider the VAT a non issue as I consider it a priority payment.

    The issue is recent growth and the need for flexibility in terms of finances while things stabilise. I think you are right, cards are probably the way to do it, I'll look into that, thanks.
     
    Posted: Jul 16, 2017 By: hazmog Member since: Jul 4, 2017
    #10
  11. Clinton

    Clinton UKBF Big Shot Free Member

    3,249 1,063
    Are you sure?

    Your OP says: "I have more staff and upcoming VAT bills etc that I need to take care of but don't have the funds readily available."

    What happened to the VAT money if you didn't spend it? Is it the case that you invoiced people and didn't get paid yet? And if you invoiced them, why can't you factor those invoices?
     
    Posted: Jul 16, 2017 By: Clinton Member since: Jan 17, 2010
    #11
  12. hazmog

    hazmog UKBF Contributor Free Member

    45 2
    I have not spent the VAT as yet, but I did consider borrowing from it as it was meant to be sat there for another 3 months...or so I was told by my accountant who it turns out was wrong.

    Moving forward, do you have a suggestion of how best to ring fence VAT? I can imagine a scenario whereby I do spend that money and we could get into trouble. I thought about a separate account but I know this would confuse our accounting software, plus any overdraft I am offered is based in part to the health of our main account which normally has thousands in it (much of this is VAT).
     
    Posted: Jul 16, 2017 By: hazmog Member since: Jul 4, 2017
    #12
  13. hazmog

    hazmog UKBF Contributor Free Member

    45 2
    Also, just to add - thank you for your reply, I do appreciate it.
     
    Posted: Jul 16, 2017 By: hazmog Member since: Jul 4, 2017
    #13
  14. Mr D

    Mr D UKBF Legend Free Member

    7,054 743
    HMRC won't do more than grumble over late VAT payments. By a month or two. Get into longer than that and can send to debt collection, add fines etc.
    Its not ideal and you risk running up against next bill being due soon after.
     
    Posted: Jul 16, 2017 By: Mr D Member since: Feb 12, 2017
    #14
  15. Ian J

    Ian J Factoring Specialist Full Member - Verified Business

    4,489 1,263
    At the end of every month I calculate the Vat owing for the month and put money on deposit to cover it
     
    Posted: Jul 16, 2017 By: Ian J Member since: Nov 6, 2004
    #15
  16. hazmog

    hazmog UKBF Contributor Free Member

    45 2
    Do you put it into a separate account?
     
    Posted: Jul 16, 2017 By: hazmog Member since: Jul 4, 2017
    #16
  17. atmosbob

    atmosbob UKBF Ace Free Member

    3,115 692
    Been there, done that.

    Firstly there is more than one bank, all of them desperate for business. If you want an overdraft facility bargain like mad. Some businesses pay half as much for their overdrafts as others.

    Secondly ask your customers for staged payments.

    Third, negotiate longer payment terms with your suppliers. Its amazing what shopping around can do.

    Forth, the closest finance you can find is tightening your own belt. Stop spending.
     
    Posted: Jul 16, 2017 By: atmosbob Member since: Oct 26, 2009
    #17
  18. hazmog

    hazmog UKBF Contributor Free Member

    45 2
    Thanks Atmosbob.

    1 - really good idea.
    2 - already do this and got it working pretty nicely.
    3 - we don't really have suppliers, just staff and the usual bills that come with business
    4 - Yep, I'm on it, it's tricky though as expanding is expensive!

    Thanks again.
     
    Posted: Jul 16, 2017 By: hazmog Member since: Jul 4, 2017
    #18
  19. Mark T Jones

    Mark T Jones UKBF Enthusiast Free Member

    1,775 468
    I would certainly talk with a respectable factoring broker like @Ian J (don't waste time with finance brokers who bolt factoring on). Factoring is best used where there is real and sustainable growth.

    Also, very good points by @atmosbob It's always best to put your house in order before you look at borrowing

    From the limited information available, I think you will struggle to get a term loan, also m not sure it is the right solution for you m
     
    Posted: Jul 16, 2017 By: Mark T Jones Member since: Nov 4, 2015
    #19
  20. Ian J

    Ian J Factoring Specialist Full Member - Verified Business

    4,489 1,263
    Yes. I have both a current and deposit account with the bank
     
    Posted: Jul 16, 2017 By: Ian J Member since: Nov 6, 2004
    #20