Month: August 2019

The complete guide to business funding

Finding the right source of funding is key to the success of every start-up. Learning all about funding, as well as the tips when seeking out a business loan, is vital on the road to growth.

Turning an idea into a business and growing an operation requires money. To help kick-start, sustain, or expand the business, entrepreneurs look to the usual sources of funding including family members, angel investors, crowdfunding, loans and grants.

Suffice to say, the routes to funding are many and there isn’t a right or wrong approach. It is all down to how you manage the process. If you manage it well, your business will receive a big boost. But if it is mishandled, funding can lead to a destructive cycle of debt.

At Tax Agility, our small business accountants work with many entrepreneurs across London helping them with financial matters. In this article, we aim to discuss different types of funding and how to go about acquiring it.

The three types of funding

Most people are aware of the two basic routes to getting money: either through trading away ownership of your company, known as equity; or through borrowing money, known as debt. A hybrid of debt and equity financing called mezzanine financing is the third option. Mezzanine financing is often used in commercial real estate purchase and it allows the lenders to convert unpaid debts to an equity interest in the company in case of default. As the first step of funding is in deciding which route you want to take, let us take a step back and discuss each option properly.

Debt

A simple online search on ‘small business financing’ will reveal many sites offering small business loans, with most of them showing images of cheerful and seemingly successful models as if to say debts (borrowings) are good for you and if you take on a loan, you can look as brilliant as the models.

Debts can spur growth if they are used right; but make no mistake, acquiring a small business loan is actually incurring debts that you have to repay the loan plus interest within a specific time period without fail. If you are on the road to profitability, paying off the loan may seem easy, but when you are hit with a series of cash-flow gaps or going through a low period with declining sales, paying off the loan can be a real struggle.

Another reality is that many lenders do not want to lend you the money on the basis of a great idea. They want to see substantial track records and/or business assets which can be used as collateral. In other words, they want some form of security that you can pay back the loan.

Having said that, financing your business through incurring debt does have its benefits and they include:

• Unlike equity, you retain ownership of your business.
• Loans are widely available; and because it is rather competitive, there are lenders who will consider small business loans without collateral.
• The interest rates can be low, especially if you seek out government-backed schemes.
• Interest paid on business loans is a deductible expense.

Equity

When lenders ask for a percentage of ownership in exchange for the money your business requires, it is equity financing. The lenders involved could be financial institutions or public investors, as well as angel investors who usually come in the early stage to help profitable small businesses in their efforts to grow.

The advantages of equity financing are:

• Your investors have a shared interest in your growth. This can be particularly beneficial if the investors have connections, knowledge and experience in your industry and are well-placed to help facilitate this growth.
• There is no need to make any ongoing repayment. This is attractive to start-ups that are not making a profit yet and/or are struggling with their cash flow.

However, the benefits have to be balanced with the primary disadvantage of equity funding: a loss of control. While certain investors may be rather hands-off and trust your abilities and judgements, others can ask a lot of the companies that they have invested in. They may even want to exert control over decisions – in some cases everyday decisions – and this is where conflicts arise. Needless to say, finding equity lenders who align with your goals and vision is key here.

Mezzanine

Mezzanine funding is a creative blend of debt and equity and how it is structured depends entirely on the terms of the agreement and how the business events unfold. Traditionally, mezzanine is used for complex and large-scale commercial deals but recently, it has started to appear on SMEs’ radar as a funding option. How mezzanine financing works is it allows lenders to convert unpaid debt to an equity interest in the company in case of default.

Mezzanine funding is best illustrated with a simplified example here: assuming your business needs £100,000 to increase production in the next 12 months. The lender, a specialist mezzanine investor, lends you the money against a stake in the company’s ownership. Due to a delay in raw material and a decline in sales, you cannot pay back £50,000 of the £100,000 loan. In this instance, the lender can convert the unpaid £50,000 debt into shares and become co-owners.

Top tips for seeking a business loan

As chartered accountants, we are asked frequently by business owners about different types of funding and the best way to pursue it. The answers to these questions actually lie in two documents that are within your disposal: your business plan and the company accounts if your operation has been going on for a while.

Your business plan is your roadmap for business success. It helps you put aside your emotion and make a realistic evaluation of your idea and list out all the elements needed to turn the idea into a reality. It covers everything from market analysis to financial projections. However, please do not assume that it must be a rigid 200-page document which becomes obsolete the minute you finish writing it. Rather, your business plan is a document that asks hard questions and covers different scenarios. Most importantly, it allows you to be realistic and adapt when necessary.

If you have been trading for a while, then your company accounts are equally important. Containing a balance sheet, a profit and loss account and directors’ report, they represent how your company is managed and the strength of your financial position at present. While cash flow forecast isn’t part of your company accounts, its importance cannot be undermined because most lenders would want to see it. If you would like to know more about cash-flow, follow the link to this article “Five ways to improve your company’s cash-flow”.

In essence, before submitting any funding application, it is best to go through your business plan, company accounts and cash-flow forecast. You should also ask yourself all the questions that a potential investor would ask, including:

• How much do you need?
• How will the additional money help your business in more ways than one?
• How much will it cost your business?
• If it is a debt, how long will it take you to pay it back?
• If it is equity, how long until the investor will see a return on their investment?
• How will the business adapt if the business does not go according to plan?

Acquiring the funds for your business

In this section, we would like to discuss the sources you can go to acquire funding for your start-ups or small business.

Start-up loans

Knowing that most start-ups will struggle to get a business loan from a traditional bank, the UK government has set up the Start Up Loans Company to provide easy access to loans of £500 to £25,000 for budding entrepreneurs. The loans have a fixed low 6% interest per annum, plus it comes with free mentoring and exclusive offers to help kick-start your venture. You can find out more at www.startuploans.co.uk.

Bank loans

If your company and yourself have a good credit score and you can demonstrate profitability and growth, then it is likely that your bank may approve your loan application. At present, HSBC offers small business loans from £1,000 to £25,000 with 7.4% interest per annum – there is even a tool on their website allowing you to check your eligibility.

Peer-to-peer lending

The concept of peer-to-peer lending first appeared in 2005 with the idea of matching lenders with borrowers. One of the largest platforms today is Funding Circle, which is said to have helped 72,000 small businesses globally in obtaining unsecured loans. To make it easy for both lenders and borrowers, these peer-to-peer companies perform credit assessment and manage the repayment process. It is not all rosy however, as the collapse of Lendy in May 2019 saw thousands of investors losing a significant chunk of their investments.

Angel investors

Angel investors are individuals with wealth and connections who will invest in your business and they may also give advice pertaining to how your business is managed. In exchange, they usually want a percentage of your company. The one question most entrepreneurs have with angel investors is where they should begin looking for one – the answer is online. Newable, previously known as the London Business Angels, is a good place to start. Other sites that connect angel investors with entrepreneurs include Cambridge Angels, Seedrs and AngelList, to name but a few.

Venture capital

While angels are individuals, venture capital refers to companies made up of professional investors who look for companies with fast growth. Almost exclusively equity funding, venture capital deals with large sums of money, usually a substantial investment that can set the company involved on a path to initial public offering, hoping that when the shares hit the public market, they will make much more than what they have put in.

Crowdfunding

Many people assume that crowdfunding and peer-to-peer lending are the same but they are different in reality. Crowdfunding sites like kickstarter allow individuals to contribute to a project (which can be a creative film or a new generation product) and may or may not receive a reward in return.

Grants

In the UK, grants provided by the government and/or local councils can assume many forms – they can range from broadband subsidy (up to £350) to research in agri-tech (up to £50,000) in a specific geographic area.

Love money

The term ‘love money’ refers to money borrowed from friends or family members to start or grow a business venture. It is highly common among entrepreneurs because the lenders do not usually ask for collateral, do not often include interest, plus they are more likely to provide you with far more flexibility when it comes to repayment. Keep in mind, however, that this form of funding is not without its risk. Taking money from friends and family can lead to rifts, resentment and even the complete destruction of relationships, so tread carefully.

Self-funding

Self-funding is hardly mentioned but at Tax Agility, we know from experience that the first person many entrepreneurs look for help is actually themselves. Driven by passion, entrepreneurs make use of personal savings, liquidate their assets, and some even max out their credit cards (incurring debts) to turn their passion into a business and work relentlessly to sustain it.

While the self-funding effort is admirable, it does pose a high personal risk. Also, it is worth noting that personal funds are usually finite, so it is wise to have a back-up plan and know when and how to source for additional funding is useful.

Get solid business advice from Tax Agility

In order to find the right type of funding, and to prepare your business for growth, you need sound business advice first. At Tax Agility, our chartered accountants help small businesses across London with more than just company accounts, tax advice and payroll. We believe that if you grow, we will grow too, which is why we are with our clients every step of the way in their journey towards success.

If you are ready to grow and expand your business, our management consulting services may be able to assist. The areas we cover include:

• Preparation of annual business plans, forecasts and projections.
• Management accounting and delivery of regular overview information.
• Review of credit control and cash management procedures.
• Attendance at key business meetings.
• Creation of strategic plans for business acquisitions and disposals.
• Advice regarding capital structure and business valuations.

To get in touch and see how we can assist in safeguarding your short and long-term financial health of your business interests, call us on 020 8108 0090 or fill in our online form.

This article was first published in 2018 and was updated on 28/08/2019.

If you found this useful, you might also like:

• Small Business: 5 ways to get new customers
• Accounting tips for small businesses
• Five ways to improve your company’s cash flow

This blog is a general summary. It should not replace professional advice tailored to your specific circumstance.

by Donovan

Accounting tips for small businesses

Running a small business is highly rewarding, but accounting and tax compliance are time-consuming tasks, so what can you do?

In 2017, a survey carried out by the marketing research company OnePoll with 1,000 working people suggested that the UK is a nation of budding entrepreneurs. The majority of respondents (54%) said that they wish to become their own boss at some point and maintaining a better work-life balance was cited as the most common reason.

While it is true that owning a business is fulfilling, many entrepreneurs also know that the process of running a business can be overwhelming. As a small business owner, you're in charge of many roles including product development, marketing, sales, customer service, IT and accounts, to name but a few. The reality is no one can do everything, particularly when it comes to accounts, tax and legal compliance. This is why most SMEs choose to work with an accountant the moment they start trading.

Regardless if you have been working with an accountant from day one or you have just started to consider working with one after trying to get by without, there are a few accounting tips which are useful for all small business owners that can help to prevent any nasty surprises or even get into trouble with HMRC.

Five accounting tips for small businesses

1. Keep accurate records

Although seemingly simple in theory, many business owners struggle with this mundane task and end up with a drawer overflowing with old receipts and a folder of invoices which they cannot track. If this scenario sounds familiar to you, it is time to engage a bookkeeper or outsource your bookkeeping task to an accounting firm like us, otherwise, the best way is to exercise some discipline when it comes to recording your incomes and expenses.

Why must you keep accurate records? Because without them you are likely to encounter a few issues including:

• You may not be able to claim legitimate business expenses and thereby lower your tax obligation which we will cover later.
• You may not have a clear view of your cash-flow situation.
• You may be fined by HMRC. Please allow us to illustrate this point by referring to this HMRC page which contains a warning: you can be fined £3,000 by HMRC or disqualified as a company director if you do not keep accounting records.

On the HMRC page, it says that ‘you (the director) must keep any other financial records, information and calculations you need to prepare and file your annual accounts and Company Tax Return’. This includes records of:

• All money spent by the company – receipts, petty cash books, orders and delivery notes.
• All money received by the company – invoices, contracts, sales books and till rolls.
• Any other relevant documents – bank statements and correspondence.

2. Meet your tax deadlines

As a small business owner running a limited liability company, you may be aware of the following tax obligations:

• VAT – if you are VAT-registered, you charge VAT on every invoice and also reclaim VAT charged on business purchases. You then pay the difference between sales VAT and purchases VAT to the government every quarter.

• Corporate tax – paying tax on profits from a limited company. For more information, follow this link to the article “Everything you need to know about corporate tax”.

• Self-assessment – the returns you file as a company director (if you are not taxed under PAYE). When it comes to self-assessment, the tax deadlines you must know are: 5 Oct (register for self-assessment), 31 Oct (paper tax returns), 31 Jan (online tax returns), and 31 Jan (pay the taxes you owe). Missing self-assessment deadlines will result in penalties as explained on this article “Self-assessment penalty: what happens if you miss the self-assessment tax return deadline?”

• PAYE – the taxes you pay from your salary. Please note that company directors who are taxed under PAYE and who do not have other sources of income are not required to register for self-assessment and file a self-assessment tax return yearly.

The beauty of working with accountants like us is that we can help to manage your company tax obligations, including PAYE if we are managing your payroll. We can also help you with your personal self-assessment. When it comes to taxes, our aim is to help you become tax efficient legitimately. If you are interested in our tax service, please call 020 8108 0090 or drop us a line.

3. Take advantage of cloud accounting software

In today’s digital world, small business owners should use cloud accounting software to their advantage, as it will allow them to stay on top of their finances with ease.

In April 2019, the introduction of the Government’s Making Tax Digital scheme meant that all VAT-registered businesses operating above the threshold (£85,000) are required to keep digital VAT records and send returns using a compatible software like Xero.

At Tax Agility, we are gold partners and certified Xero advisers. This means we have access to a whole host of benefits including 25% discounts on Xero subscriptions made through us. You can read more about Xero on our page "Xero, a powerful new way of managing your business accounts".

4. Claim all allowable expenses

Allowable expenses are essential costs that keep your business functioning. They can be wages, rent, business rates, repair and maintenance, to name but a few. These expenses are tax-deductible, meaning you can deduct them from taxable income legitimately when calculating the business’s profits. Essentially what it means is that after factoring in the expenses, you have a lower profit and thereby less tax to pay. However, it is important to remember that you cannot claim for costs that have a dual personal and business purpose. To find a full list of allowable business expenses, visit this HMRC page and select ‘expenses’ from the left menu.

5. Separate your personal and business finances

This is a strange one – you are not legally required to set up a separate bank account when starting a new business, but failing to do so will make your life very challenging. The main reason is because HMRC requires you to keep accurate company records as we have explained above. Apart from that, having a separate business bank account allows your company to:

• Gain a credit score and apply for loans when the business needs it.
• Have a business credit card to pay for legitimate expenses (meaning you do not have to use your personal credit card and make a claim later).
• Look professional.

Let Tax Agility manage your accounting needs

Bookkeeping and accounting, VAT, corporate tax, self- assessment, payroll and PAYE, these are all tasks that will consume a significant portion of your time. To help you manage your accounting needs, our dedicated small business accountants can take on the responsibilities for you, so that you can focus and put all your energy into growing and developing your business.

To find out how we can assist you, contact us today on 020 8108 0090 or get in touch with us via our Contact Page to arrange a complimentary, no obligation meeting.

This article was first published in 2015 and has been updated on 07/08/19.

If you found this helpful, take a look at:

• Small Business: managing rising costs
• Annual Investment Allowance explained: Tax relief for small businesses
• 7 key steps to growing a business online

This blog is a general summary. It should not replace professional advice tailored to your specific circumstance.

by Donovan