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Mike Nolan, Managing Director at finance firm Academy Leasing, pictured, considers the funding options available to help drive company growth and expansion.
The UK security sector has experienced an annual growth of 1.7 per cent over the past five years despite an uncertain economic environment in the wake of the global downturn. As a consequence, firms harbouring serious growth ambitions can look to the future with a real sense of optimism. Expansion can still prove costly however and companies looking to invest in new business resources, such as design and manufacturing equipment, may encounter difficulties in doing so as banks continue to closely scrutinise their lending decisions.
Furthermore, companies looking to introduce in the latest high level security systems may also struggle to finance their investment. When the door has been closed on traditional finance options, firms will often feel forced to re-evaluate their business plans. This doesn’t have to be the case however with alternative growth funding streams available.
1. More financial flexibility
With steady annual market growth, the sector is becoming increasingly competitive and businesses need to ensure they’re taking appropriate steps to stay one step ahead of their rivals. Substantial capital outlay, along with continued business overheads, can result in stretched cash flow leaving companies with little room to manoeuvre when it comes to financial flexibility. As a result, faced with tight budgets, purchasing assets outright may not prove to be the best option.
Leasing, on the other hand, allows businesses to spread payments over a fixed or minimum term, meaning a lower initial cost. In simple terms, it works by the organisation ‘renting’ the piece of equipment from a leasing company for a specified period of time – usually three to five years – and at the end of the agreement, the asset can be returned or upgraded. Alternatively, customers can choose a lease purchase deal where they are able to take ownership of the equipment at the end of the lease term.
Leasing not only offers a company more financial flexibility, allowing more money to remain in the cash flow but it can also help to build a strong credit history for the business due to the timely payments made each month. In terms of choosing a financier, it pays to choose a partner with experience in the security industry, given their prior knowledge of the sector and their established contacts database with equipment suppliers. They are also more likely to offer finance approval as they will be more aware of the returns-on-investment the asset can generate unlike a lender who has no previous involvement in the security industry.
2. Exploit hard assets
A company’s cash flow can easily be pushed to the limit. For security firms, money can be quickly swallowed up on business insurance, marketing collateral, vehicles or even basic office equipment, such as printers and water coolers. If working capital is needed, it can be possible to borrow against existing hard assets that have a clear monetary value. A reputable lender can offer to loan money against this equipment by completing a fair evaluation, while also taking account of other outstanding debts the company may have to determine whether the business can cover the new cost.
When it comes to equipment which is still subject to existing leasing terms and finance, the lender can offer to spread the remaining payments over a longer term to reduce monthly expenditure and help prevent cash flow from being pushed to the brink.
3. Invoice discounting or factoring?
There often comes a time when a client is late with paying their invoices or they work on 60 to 90-day payment terms. If the invoice was a relatively large one, this could have a detrimental effect on your business, especially when expenses such as staff wages are also leaving the cash flow. In such cases, a sizeable pool of working capital is required to make sure your business doesn’t go in the red. Invoice discounting and factoring enable companies to release the funds locked in invoices and inject it back into the cash flow. Invoice discounting is when the financier will lend money against unpaid bills but the organisation retains control over the sales ledger, meaning the client will not be aware that a third party supplier is being used.
On the other hand, invoice factoring involves an outsourced credit control and collection service where the financier takes over the sales ledger and takes responsibility for collecting debts.
4. Expansion by acquisition
Expansion by acquisition may represent the best option for security firms eyeing rapid growth or wanting to increase market share swiftly. This includes buying a property’s lease, estate, equipment and facilities. Funding for the takeover could come from the acquiring company’s debts, hard assets or even soft assets – equipment with little second-hand value – such as the telephone system.
If this direction is taken, it is important not to put both businesses at risk. In order to do this, the purchasing company first has to find the finance to fund the acquisition and then secure sufficient working capital for the day-to-day business operations – a two-fold process.
With bank lending still pretty anaemic in the current climate, it’s not uncommon for corporate funding applications to be turned down. However, just because the banks say ‘no’, it doesn’t mean your business plan is unviable. Alternative options are available for raising the necessary funding and can soon put your company on the road to growth, expansion and, ultimately, success.