Financing Your Business

4. Other Finance

Trade credit (paying your suppliers after 30 to 60 days) and bank finance may be all that a small business needs. Suppliers keen to enter a new market may offer extended credit. But other options are worth considering, especially for vehicle finance.

4.1 Leasing is used to finance equipment you do not need to own.

• Instead of buying the item, you rent it for a fixed period - usually three to five years.
• Payments are spread out over the period, helping your cashflow.
• You get full tax relief on lease payments, except for cars costing more than £12,000.
• Leasing can be an attractive way of financing a vehicle. In addition, there is the option to fix maintenance costs as part of the agreement (contract hire).

4.2 Hire purchase (HP) is used to finance the purchase of equipment.

• You buy the equipment, but payments of capital and interest are spread over a fixed period - usually three to five years.
• You can claim capital allowances on the equipment, and the interest payments receive full tax relief.

4.3 Factoring provides you with finance against invoices that customers have not yet paid.

• You can receive up to 90 per cent (typically 80 per cent) of the face value of each invoice immediately and the balance (less charges) when the invoice is paid by the customer.
• It may be difficult to extricate yourself and switch to normal bank finance later on when this might be more appropriate.

4.4 Stock finance, where cash is raised against the value of stock held by a manufacturing company, may also be a possibility.

4.5 Leasing, HP and factoring can all enable a business to raise more money than would be possible through traditional bank finance, although the costs may often be higher.

• Comparing the cost of different forms of finance is complicated. Key factors are fees, the period of the finance, interest rates and the tax position. Seek your accountant's advice. Focus on your cashflow first, as this is most important. Only if your cashflow is healthy and robust should you try to save money by relying on overdraft finance.