Is Now Really a Good Time to Launch an SME?

Director General of the British Chamber of Commerce, John Longworth, is reportedly less than impressed by Chancellor George Osborne’s Budget measures for helping the small business community. While he broadly welcomed the announced 1% cut in Corporation Tax, the proposed 5.6% rise in the business rates which is due for April 2012, will inevitably wipe out much of the benefit. Another bone of contention is the 3p rise in fuel duty which is scheduled for August and which many in the business sector were hoping the Chancellor would revoke. This will severely impact on all traders and manufacturers who rely on hauliers to get their goods and products to the public.

You would think that in the current economic climate, start-up rates for small businesses would be taking a nose-dive but, amazingly, the opposite seems to be true. Statistics for 2011 show that, for the second consecutive year, the number of those launching their own enterprise rose to 396,000, a rise of 9.4% on 2010 and the highest figure since the start of the credit crunch back in 2007. It would appear that the great entrepreneurial spirit for which the UK has been renowned is alive and well and still up for the challenge.

5 Tips for Financing your SME

Unless your dad happens to be Alan Sugar, Richard Branson or Donald Trump, chances are that the first port of call for the financial backing for your business will be one of the major High Street banks. The first thing they will want to see is a comprehensive and realistic business plan.

Tip number one – Be realistic about the forecast monthly sales and expenditure and keep the budget sensible but workable. There is no point in making wildly optimistic claims about predicted returns, or underplaying the amount you will need to get the business operational in the hope of impressing the bank with your business acumen. They have seen it all before and know all the tricks! It is also advisable to plan for the worst case scenario and have extra funding available for those unexpected glitches; interest rate increases, budget overruns or a period of disappointing sales.

Tip number two – Tell it like it is. The bank will want to know how you need your finances scheduled. It may well be that you won’t need the entire capital up-front, but in stages. It is vital that when first presenting your business plan you make the lender aware of the total amount you will be looking for and not break the capital down into increments. There is nothing more likely to get a bank twitchy than a small business who asks for £20,000 in January and then returns for another £20,000 in April. Base the loan request on the total sum needed to finance the business to ensure that all parties are clear on their commitments and expectations.

Tip number three – Don’t be influenced by negative publicity. The media is full of how the banks are reluctant to lend to SMEs (small & medium-sized enterprises) but, in fact, this is far from the truth. They are still lending at a rate of approximately £500 million per month and it is estimated they hold over £37 billion in outstanding loans. Financing a start-up business through a loan offers a much better long term prospect than using an overdraft facility with the bank. Generally the loan period is between 1-10 years although it is possible to arrange longer terms, and the regular, pre-arranged repayments make budgeting easier for the new business owner. Loan repayments are usually scheduled on a capital plus interest basis and some lenders will allow a ‘holiday’ period to be built into the arrangement to allow the business to establish a good level of cash flow before the initial payment is due. Do shop around for the best deal as rates can vary although are, on average, 2.6% above the bank’s base rate, dependant on the risk assessment of the new business taken by the lender.

Financial Tools for Trading

Before trading can begin, the new business owner needs to think about how his sales transactions will be processed. It is likely he will need to compare Merchant Account services to determine the best provider for his business. A trader must have Merchant Account facilities if he wants to accept credit and debit card payments for his goods and services. These are provided by several UK banks, known as acquiring banks.

Tip number four – Shop around for the best deal. You don’t have to use the same bank for your Merchant Account as you do for your loan, although in some circumstances they may give you a better deal. Compare the competition as rates vary considerably between providers depending on many factors. Banks will assess your business on the amount of money that will be generated through card transactions or may feel that there may be a heightened risk of card fraud in a particular business. Fees for each credit card transaction taken can vary from less than 2% to as much as 6%, while debit cards are generally based on a flat rate fee of a few pence per sale.

Finally, tip number five – Don’t get complacent. The new business is up and running and things seem to be going well, but don’t lose sight of the cash flow. Keep regular checks on expenditure and income and, at the first sign of a problem, make adjustments. Making small cut backs early on will save the trauma of having to make major alterations if the business reaches a crisis point further down the line.

Bio:

Hi I’m Ed, and I work in the exciting, fast paced and ever-changing world of a B2B services. I’ll be trying my best to keep you abreast give you a wide smorgasbord of handy hints, tips and advice to get the squeeze the best out of your business.