Practical finance alternatives

Typical lenders, such as the main banks, require personal guarantees or to lock people in to loans for a certain period of time, but in recent years other providers have sprung up, making it easier for SMEs to access working capital, especially during their growth phases.

John McGlade, head of sales and finance at Convertibill explains that in their business, they work off a purchasing rather than a lending model, enabling them to be a little bit more flexible, agile and faster when reacting to customers’ needs. Customer finance is one example of what’s available.

“Take, for example, a growing company that is fairly modest but may have won a big contract and suddenly the turnover is going up tenfold. The problem for them is how to get the finance to put boots on the ground to fulfil the contract. In this case, our customer will have an order or invoice out to the company and we are happy to fund them on the basis of that.

“With typical lending providers, let’s say you’re turning over €1 million a year and one of your debtors is worth €500,000 per year, those other providers will have a debtor concentration rule of 20 per cent, so they’ll only lend €200,000 against the €500,000 – we will give the whole amount. The bank would say we can’t give you the €500,000 because what if that debtor goes bust, but we have decided that debtor is not going bust. There is a risk attached to everything but we are really happy with that debtor. Because the company now has the finance, not only are they able to service that large contract but they are able to hunt for new ones.”

Supplier finance works for a company that might be just about to win a big contract but for it to fulfil that contract it needs supplies from China, for example, but it does not have the working capital to pay the supplier. "We will pay the suppliers upfront – a discount can often be reached with the supplier for this – and the growing company can now avail of the opportunity," says McGlade.

Order finance

Order finance is for companies that have not yet invoiced but haven’t delivered either and need finance. “If we are happy with the end client, and are happy that it’s a firm order, we can supply the working capital to the growing company,” McGlade points out.

Close Brothers Commercial Finance also offers a number of SME-friendly lending products, according to managing director Ciaran McAreavey. “Asset finance allows SMEs to purchase a piece of equipment – they don’t have the cash, so they can either look for a loan or we will pay for the piece of equipment for them and spread the cost of that over a longer term, typically five to seven years. The benefits of that are that it’s quick to put it in place, because we provide that loan based on our knowledge of the asset that we’re funding. We would typically advance 85 to 90 per cent of the value of that asset so you can get a high proportion of the cost funded and the credit decision will happen within 24 to 48 hours. We can also provide an equity release on equipment already owned by the company.”

Invoice finance is a facility where the firm lends up to 90 per cent of the customer’s trade debtor book, so if it is owed €1 million by its various customers, Close Brothers will lend it about €900,000. “They dispatch the goods, they send us the invoice and we send them the money,” says McAreavey. “The market-leading invoice finance system offered by Close Brothers works alongside the SME’s financial accounting software, is self-reconciling and can release up to 90 per cent of the value of invoices as soon as they have been raised. This allows real-time access to working capital.”

Another product which larger companies find useful is asset-based lending. “This is a product that offers higher levels of funding of between €1 million and €25 million,” McAreavey explains. “It combines invoice finance facility with additional funding provided against assets such as stock, property or plant and machinery. For businesses with a strong track record of cash generation, a cashflow loan can also be included within the package. This type of finance is commonly used for facilitating strategic plans such as a complete refinancing, an acquisition or a merger, but it can also provide additional working capital, when required, to finance growth.”