Self employed outlook- Raising finance

This blog post is the first in a series for business owners and the self employed.

Marc Lawson of Business Vision Accountants outlines the options for financing your business.

Every business from its commencement and through its development and growth will need finance.
The forms of finance and methods of obtaining them have substantially changed in the last 10 years so to help you I’ve set out below some brief points on the type of finance now available and guidance on how to use those choices.

Sources of finance

Peer 2 peer lending

This has now become a major source of finance for businesses. The process works by a web based company acting as the middle man between investors with money to invest and business owners who are keen to attract borrowing at competitive rates without necessarily having to resort to high street banks.

One of the biggest of these is Funding Circle. The process works by a business putting forward a business plan. Funding Circle will then credit rate that plan on behalf of its investors and publish it (assuming they give it the go ahead) on their website. After a short time the business will then have a long list of potential investors and assuming they have sufficient offers to cover their original loan request, then they simply need to give the go ahead. Funding Circle will then collect loan repayments direct from the business (so that there aren’t hundreds of individual repayments) and give out interests to the investors.

Bank loans and overdrafts

Banks are still very active in the market of lending and typically lending would take the form of an overdraft or bank loan. Overdrafts are a very flexible form of finance which, with a healthy income in your business can be paid off more quickly than a formal loan. The downside of an overdraft is they are typically repayable on demand and renewable annually so are not as certain as other forms of lending.

Many businesses appreciate the advantage of a fixed term loan. This gives them the comforts that regular payments have to be made on a loan and this makes for costing and budgeting easier. They may also feel that, the bank is more committed to their business for the whole term of the loan.

Interest rates are relatively low at the moment but banks have typically sought to charge a higher “base rate plus” so rates of 8 or 9% are still common.

EU Referendum - Don't Panic

Our Managing Director Paul Northmore reviews the commentary received following the UK's decision to leave the EU.

The people of the UK have voted to leave the European Union.
Not only is this is major financial decision for the country but this will also have wider implications for markets globally.
We have already seen an expected change with the value of the pound plunging but the message to our clients is 'Don't Panic'.

We have received articles today from Investment commentators.

It is still early days to comment confidently on the financial situation we will find ourselves in as we exit, but we are assured that the UK economy can handle this transition.

Neil Woodford has dismissed fears over the impact of the decision, concluding the long-term economic future of the country will be unaffected by the vote.

Bank of England -  'We are well prepared for this'

The Bank of England says it expects market volatility after the Brexit vote but that the UK economy can handle it.

Speaking at a press conference, Bank of England governor Mark Carney says: “Inevitably, there will be a period of uncertainty and adjustment following this result.
There will be no initial change in the way our people can travel, in the way our goods can move or the way our services can be sold.
And it will take some time for the United Kingdom to establish new relationships with Europe and the rest of the world.”

Carney added the Bank expects “some market and economic volatility” as those new relationships are struck.

He added: “But we are well prepared for this.  The Treasury and the Bank of England have engaged in extensive contingency planning and the Chancellor and I have been in close contact, including through the night and this morning.
The Bank will not hesitate to take additional measures as required as those markets adjust and the UK economy moves forward.”

What happens next?

The vote to leave followed by David Cameron’s announcement that he will resign before October's Conservative Party Conference, sets in motion a process that will trigger Article 50 of the Lisbon Treaty, the formal mechanism for withdrawal from the EU. Unless a withdrawal agreement is reached earlier, this will start a two year period of negotiation. During that time the UK will still be a member of the EU and bound by its rules and treaties.

So what does this all mean for your finances?

Mortgages

With regards to mortgages it really could go either way.
It's possible that the Bank of England may consider raising interest rates to counteract the reducing value of the pound, with the Treasury forecasting a rise between 0.7% and 1.1% in borrowing costs which David Cameron claimed may see increase of up to £1000 per year.
However in the case of a severe shock to the UK economy, the Bank of England might have to consider reducing rates. In which case, the cost of lending could fall.

House prices

According to the BBC The International Monetary Fund (IMF) has warned that Brexit could cause a sharp drop in house prices. This was on the expectation that the cost of mortgages would rise.

The Treasury has said house prices could be hit by between 10% and 18% over the next two years, compared to where they otherwise would have been. This would be good news for first-time buyers, but not so great for existing homeowners.

These projections would be incorrect if the Bank of England were forced to cut interest rates.

Pensions

In the short term we are told that Brexit is unlikely to have a significant impact on the UK pension plans. However, it will give the opportunity for the UK legislation to deviate from EU requirements in the future.

In the build up to the referendum the prime minister said that a Brexit would threatened the 'triple lock' for state pensions - the agreement by which pensions increase by at least the level of earnings, inflation or 2.5% every year.

Investments and Savings

The investment platform Hargreaves Lansdown has told its clients that it is impossible to know the long-term economic implications of Brexit on investments.
"We cannot assume an 'Out' vote will be bad for the long-term prospects of the stock market" it said.

UK shares may become less attractive to foreign investors and would therefore decline in value.  However shares may rise with company profits and with the pound weakening, exporters may benefit so the value of shares could rise.

It really is too early to say exactly what will happen.  Changes are already taking place as we write.  Please rest assured that we are keeping our eyes firmly on developments in order to advise you on your finances.

If you would like to discuss your situation please contact your adviser by email or by calling the Manning and Company office on 01752 837950 or for Anthony Trueman and Co 01822 859368.