Things to watch out for when dealing with Working Capital Finance

Many developing SMEs tend to face difficulty maintaining positive working capital and keeping on top of their debts and, in order to regain control and restore some financial stability, business owners will often apply for Working Capital Finance. However, as always when discussing finance for your business, you also need to be aware of what to look out for before entering into an agreement, including aspects such as whether you are applying for a secured product and how lenders will charge for their services. So in order to help guide you to the most appropriate Working Capital Finance solution for your business, we’ll look at:

• Interest rates
• Product requirements
• Secured vs unsecured
• Time taken to release funds
• Additional costs
• Terms and conditions

How do their rates compare with other lenders?

When deciding which lender to choose, it’s always wise to compare rates. With loan-type products, lenders often have a range of interest rates showing how much your business will be charged. The strength of your credit score determines which bracket your business sits in, so the weaker your score the more interest you’ll be expected to pay and vice versa.

In addition, you also need to know how they measure interest. With loans, lenders tend to use Annual Percentage Rate (APR) but with products such as Merchant Cash Advance, a set Factor Rate is used instead. That said, some lenders may choose to discuss this in terms of yields, whilst others may prefer to use Flat Rates. As such, each lender will have their own definitions and differences regarding how interest is calculated, making it more difficult for you to compare products. Therefore, it’s essential that you look at the loan documentation in order to compare the actual repayment profile of each product.

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Will lenders look at your personal or business credit report?

This all depends on the product in question. Working Capital Finance contains a variety of business finance products, all of which have different entry requirements. For example, when applying for a Bridging Loan, as well as owning property, lenders will also ask to review your credit score and business history. This is important for loan products as it determines which interest bracket your business will be placed in and whether your business can afford the repayments.

However, when applying for products such as Merchant Cash Advance, your credit score and business history doesn’t play such a large role and often isn’t asked for. For this product, in particular, the emphasis is on the strength of your monthly credit and debit card revenue. So, as long as you’re able to support card sales, the probability of getting accepted tends to be high. That’s why it always pays to ask lenders about the entry requirements for each of their products.

Is the product secured or unsecured?

Asking whether a product is secured or unsecured is also a smart move since these two terms affect your business in various ways.

A secured product always requires you to provide collateral, such as your home or essential business equipment, as security. For lenders, this means they’re accepting less risk and could offer you a larger lump sum. However, this also means that if your business falls behind in making repayments, these assets can be seized to recover the lender’s losses. For SMEs that don’t possess many valuable assets, acquiring this form of funding can be hard, and an unsecured product may be a more viable option.

With any unsecured products, you are not required to offer assets as security. However, because of the increased risk, the amount you can borrow will be lower and you may have to pay more in interest. But should your business become unable to make repayments, lenders cannot pursue you for the remaining debt. Consequently, it can be harder to acquire this form of funding or receive all the sums that you may require. If you require a larger sum, you can offer lenders a Personal Guarantee.

Are there any additional fees?

This all depends on the product and the lender. Some may choose to charge set-up fees, administration and legal costs, as well as interest. For products such as Asset Refinance and Bridging Loans, you may also have to pay surveyor fees, since a qualified surveyor will need to be dispatched to determine the worth of your assets. So, when first approaching lenders, make sure that they are clear about their charges, as these all add up to the total cost of finance.

Are their Terms and Conditions too restrictive?

When first approaching a lender you can ask to review a draft contract, if one is available. This is a great opportunity to examine their Terms and Conditions and make sure they fit in with what your business needs. Ultimately, both you and the lender want a deal that’s fair, but you don’t want to be locked into an agreement that’s too restrictive either. For example, Merchant Cash Advance providers can consider encouraging customers to use cash instead of their credit cards as a breach of condition. Some lenders may attempt to control how funds are applied. Or, they could force you to purchase an asset from a specific vendor even though it’s cheaper elsewhere.

As such, what makes a great deal is one that offers you flexibility and the freedom to breath. So make notes on what may prove an issue during the agreement and draw a bottom line. If they refuse to budge, or the amendments aren’t good enough, don’t be afraid to walk away and look elsewhere.

Choosing the right finance solution for your business

When seeking finance for your business, one of the aspects any business owner values is choice. You want a product that’s flexible and adapts to your business but won’t strangle growth whilst you make repayments. Yet, above all, you want the right benefits and a competitive rate. With Working Capital Finance, the possibilities open to your business are wide. But, presented with so much choice it can be confusing. How can you be sure you’re applying for the most appropriate finance solution that comes with a highly sought after interest rate?  

If you’re suffering from negative working capital, know that with Rangewell there’s a sea of opportunity waiting to be explored. Don’t hesitate, apply now, contact us today at 02036374150 or contact@rangewell.com and let us answer your questions about Working Capital Finance.