How to find finance as cost of living crisis bites

From premises, staffing issues, dealing with local competition, to HMRC and the DVSA, sourcing products and coping with inflation, there’s much to think about when setting up an independent garage. But one source of worry for many is how to keep the financial plates spinning.

Indeed, Bob Hope, the late American comedian, once said that “a bank is a place that will lend you money if you can prove that you don’t need it.”

CAT noted ten years ago that “aftermarket businesses are more likely to get accepted for finance than they think and could provide a significant boost to the economy if they applied.”

It’s clear that those after funding just need to look and what follows, while simplistic, shows that there are options, and not all are that obvious.

The high street

The first stop is often a loan from a high street bank. Interest rates vary and banks will invariably impose strict qualifying criteria and requirements – often demanding three years’ accounts – which hinders start-ups. Challenger banks such as Starling, Acorn and Cash Plus, are alternatives and shouldn’t be ignored because they’re not ‘visible’.

A business loan is a relatively inexpensive form of borrowing compared to other methods such as using a credit card and comes with flexibility in terms of both repayment terms and the amount that can be borrowed. Loans are safer than current account overdrafts as they are not repayable on demand. Importantly, they can be used for almost anything from expansion to the acquisition of new equipment.

On the flipside, a garage will need to provide a business plan, its owners as well as the business needs to have a good credit rating, and personal guarantees which make borrowers personally liable if the business defaults – as well as security – could be needed.

An alternative is a revolving credit facility. This allows businesses to borrow, repay and then reborrow when needed over the agreed term. It’s great for emergency purchases and everyday costs. However, they tend to only run for six months to two years.

Online lenders

Another option are immediate and short-term loans. Google has links to such firms including Funding Circle, Swoop Funding, and Everyday-loans. Each varies in what they offer, but they provide money that can be used for materials, staff, equipment, or a van, as well as tax bills and VAT.

It’s important to note that these loans run, typically, for between three and 18 months. They are simple to apply to, fast to respond and could be more in tune with the demands of those with poor credit ratings, that have a thin credit file or for higher risk situations. The downside is that the interest rate is tied to risk and the repayment term is short.

Peer-to-peer lending
Another option are peer-to-peer lenders. Here a number of online platforms operate as intermediaries between firms and investors with the cost depending mainly on how many investors are prepared to loan.

Asset-based finance

Good plant and equipment is key. But such equipment – vans, column lifts, heaters, and testing equipment – isn’t inexpensive.

In this instance garages might consider asset-based finance from lenders who fund 80% – 90% of the price of equipment via a loan that is repaid over a fixed term with interest. Depending on the agreement, the garage may own the equipment once the original loan has been repaid.

Demand for asset finance is growing. The British Business Bank, the state-owned development bank, says advances rose by 7% last year.

There are several flavours of asset-based finance:

The first is a finance lease which involves renting equipment in return for a fixed monthly payment.

Then there’s hire purchase (lease purchase). This is similar but differs in that the borrower ends up owning the equipment once repayments have been made in full.

Lastly, there’s contract hire which often is used for the acquisition of vehicles with payments spread over the agreed term of the contract.

This form of borrowing makes budgeting easier because of the fixed monthly repayment. Further, repayments can be offset against the firm’s tax bill along with capital allowances to further lower a tax bill.

It needs to be remembered that equipment becomes security for the loan and will be removed by the lender if payments aren’t kept up.

Business credit cards

Ad hoc purchases – fuel, stationery, small pieces of equipment – suit credit cards well. However, they are very much short-term in outlook and carry punitive rates of interest if the borrowing is not repaid before the due date.

There are bonuses in using a business credit card. If bills are cleared on time, they can be used to build a credit rating which in turn may lead to successful loan applications for larger sums. Some give points or cashback on spending.

But cards carry high rates of interest and come with lower levels of facility – borrowing – compared to traditional loans.

Again, Google offers a window onto what is available as do sites such as money.co.uk and gocompare.com. Bank of Scotland, HSBC, Lloyds and Santander and some lesser-known providers including Capital on Tap, Payhawk, Juni and Danske Bank offer credit limits from £3000 to up £2 million (Juni) or more.

Government backed programmes

Few consider a government backed start-up loan from the British Business Bank. This is an unsecured personal loan of between £500 and £25,000 that requires no personal guarantee. On top of that, if there are several business partners involved in the firm, each can apply for funding – but to a maximum of £100,000 per business. Applicants can even apply for a start-up loan when they are buying an existing business. Loans can also be used to buy a franchise.

There are qualifying criteria to meet: Applicants need to be starting a new business or buying one that has been trading for up to 36 months; unable to secure finance from other sources (self-declaration); the business type and loan purpose must be eligible (garages are, but debt repayment, for example, is not), and applicants must pass a credit and affordability check.

There is a fixed interest rate of 6% per annum and loans can be repaid over periods of between 1 and 5 years. There is no application fee and no early repayment fee.

It’s worth noting that a firm may be able to tap into other finance and support depending on use case and region. There’s a searchable page on the government’s website, https://www.gov.uk/business-finance-support, and for example, BCRS Business Loans can offer loans of between £10,000 and £150,000 to businesses in the West Midlands that cannot get funding elsewhere.

Merchant Cash Advance

Something else to consider is a merchant cash advance, especially useful as garages invariably take payment by card. Simply put, the funder advances a lump sum to the borrower in exchange for a percentage of future card payments made by clients. The bonus is that the borrowing is unsecured – personal and business assets are not on the line if repayment isn’t made.

Last option

Finally, if a bank turns down an application for finance there is the Bank Referral Scheme. This arrangement requires any bank that rejects an SME’s application for funding to refer it to a platform offering information on what other forms of funding might be available. The platforms – Alternative Business Funding, Funding Options and Funding Xchange – can also help when assessing potential alternative finance options.

Summary

This is just an overview of what is available. Owners need to apply themselves and devote some time to researching what it is they need and who might supply it. The information is all out there on the web.

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