When your business requires finance, it is important to choose the right option, says Michael Farrell.
For many businesses in need of finance, the first source they think of is the bank—whether for an overdraft or to arrange a medium or long term loan. However, there may be other finance sources to consider. Previously, I discussed some of these in an article on alternative finance which can be found here.
In today’s article, with Brexit concerns preoccupying business owners across the island of Ireland, I want to briefly highlight four options for importers and exporters to keep in mind.
• Letters of Credit: This is where a bank or financier charges a fee for supplying a letter of credit which guarantees that a buyer’s payment to a seller will be received on time. Usually, the bank or financier will require security to provide the letter of credit. Letters of credit give an exporter peace of mind when shipping goods in advance of receipt of payment.
• Trade Finance: This short-term financing is often used by import and export businesses. Trade finance is usually secured on goods or backed by an insurance policy.
• Forward contracts and options: These set the price of exchange rates in advance of a transaction, or provide an option to exchange, currencies at a set price. This helps avoid currency fluctuation risks.
• Export insurance policies: These insure an exporter against the risk of not being paid under a contract. They can insure you against political or economic events as well as insolvency or failure to pay.
Other finance sources
Bank loans, share issues, peer-to-peer lending, and venture capital are other potential finance sources, the suitability of which will depend on individual business circumstances.
In addition, Government loans or grants may be available either to fund business growth or to help cope with the impact of Brexit. For example, under the SBCI Brexit Loan Scheme, subject to certain terms and conditions loans are available through AIB, Bank of Ireland and Ulster Bank to fund innovation, change or adaptation of a business to mitigate the impact of Brexit and to meet certain future working capital requirements.
When seeking to raise finance, it is always advisable to obtain professional advice to confirm that the planned expenditure is justified, to weigh the merits of potential finance sources and to examine the repayment and tax implications before any decisions are made.
If you would like more information on any of the matters discussed in this short article, or would like details of how PKF-FPM can help, please get in touch.
Michael Farrell l Director