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Internal sources of finance: making the most of what you have

POSTED: 16th June 2015
IN: Guides
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In the wake of the financial crisis, many UK SMEs had to adjust to a reduction in availability of traditional bank finance.

undefinedAnd, despite access to traditional forms of finance improving in recent years, according to the SME Finance Monitor, this trend away from credit cards, loans and overdrafts is continuing. Between 2011 and 2014, use of ‘core’ forms of finance by UK SMEs declined by 10 per cent.

In its place, many small businesses have been seeking more innovative forms of finance in a bid to increase available funds. Seeking finance from within, rather than externally, is just one way that businesses can release cash without expensive borrowing.  

Internal sources of finance are possibly the most efficient way for businesses to access the funds they need, allowing them to make the most of the assets they already have. There are four primary internal sources of finance, including:

  1. Remortgage
  2. Retained profits
  3. Sale of fixed assets
  4. Debt collection and invoice finance

Remortgaging

Despite a number of government initiatives to help SMEs fund their ambitions, some business owners find themselves remortgaging their properties in a bid to free up cash.

This can result in low interest rates and repayments spread over a long period of time. Unlike a typical business loan, it’s unlikely that the company owner will have to present a business plan to their mortgage provider.

However, this practice is not without its risks. If business owners don’t select the right mortgage deal and fall behind on repayments as a result, they could risk losing their home.

Retained profits

Retained profits are part of the net income that has been kept in the company with the intention of paying them to the owners. In some cases, owners turn down such payments so that the money can be reinvested into the business to fund growth. In the right circumstances, this money could have the potential to generate more cash over time, but comes at the cost of the owners forgoing an income.

Sale of fixed assets

For businesses with fixed assets that are no longer needed, the sale of such assets may help to bring money in that could be used elsewhere.

However, although this can be relatively risk free, it isn’t a quick fix. It’s not always easy to convert fixed assets into cash due to the amount of time it can take to sell expensive items. Also, once sold, the business may have to wait before customers make the payments required.

Late payments from customers are one of the most common causes of cash flow problems amongst businesses. However, there are alternative finance solutions available that use unpaid invoices to unlock much needed capital.

Invoice finance

Invoice factoring is one finance solution that could be ideal for businesses that want to free up time and money. An invoice finance provider can take on all debt collection responsibilities on the company’s behalf, allowing it to concentrate on other aspects of the business.

For companies that want to continue to collect payments from customers, invoice discounting could be an option. A percentage of the invoices’ value will still be received promptly, but the invoice finance provider will not undertake the debt collection.

While some businesses choose to focus on the sale of old assets in a bid to generate capital, assets that are used regularly should not be overlooked. Asset based lending can be used to unlock capital tied up in the valuable equipment, machinery or stock.

For example, a manufacturing company could fund a surge in seasonal demand by borrowing money held against the value of the machinery it uses each day.

As long as traditional lending to small businesses through overdrafts and bank loans decline, companies will continue to look internally for fast access to finance. While some internal finance options offer businesses a quick and easy cash boost, it’s important to be aware of the pros and cons of each solution.

Invoice finance can help businesses to unlock the cash they need to progress and thrive in their field. To learn more about how these alternative finance solutions can help you to make the most of what you already have, please don’t hesitate to get in touch with the team at Aldermore.   

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