Public Sector | 10 Jun 2023

Financing in The Care Sector

Care businesses can be really capital intensive. So when you start thinking about expanding, or when you’re setting up a new care home, you’ll probably need to bring in some additional capital.

So what is financing and how is it different in the care sector, as opposed to any other sector?

In this post, we share the basics of business finance, and highlight some of the pitfalls and benefits of different sources of cash.

We are looking at:

What do we mean by finance?
What do we use finance for?
Types of finance
The pros and cons of different types of finance
Next steps

What do we mean by finance?

The word finance can be used in many different senses, but in this article, we are looking at finance in terms of bringing external cash into your business.

This can be taken on in the form of equity finance, where someone buys shares in your business, thus introducing money into the enterprise.

It can also be achieved via debt, and as you would expect there are plenty of different types of loans and products available.

We’ll also touch on what is euphemistically called ‘off-balance sheet finance,’ or leasing.

What do we use finance for?

When choosing whether to seek additional finance and what format suits your business, it is very important to know what you’ll use it for – in fact, unless you are certain of what you will use it for, you won’t be able to say whether you should seek finance in the first place, and certainly not what type you will choose.

The most important point to make here is to be careful to choose a finance product to match the thing you are financing.

This means choosing long-term finance for long-term projects such as buying real estate, but short-term for things that won’t be as long-lived, like beds or lifting equipment.

By the same token, if you are looking for finance to provide working capital or expand your business then you may choose not to go for debt finance at all and instead use equity funding of some description.

Types of finance

Finance breaks down into two basic types; equity and debt.

Equity finance

With equity finance, you sell a portion of your company in the form of shares to an external party and they in turn hand over cash.

There are lots of different types of shares out there and very often you’ll find that people use different names for them which confuses the picture. But don’t be put off and always ask what they mean!

The most common is an ordinary share. In essence, you are selling a portion of the business and the person who holds the share is entitled to receive a part of the profit, capital growth and to vote at general meetings.

The proportion of shares you sell dictates the percentage of the business that the person owns. So if you sell 25% of the number of shares that the business has issued then that person owns 25% of the business and receives 25% of the profit and has 25% of the power.

Some shares have different features, called ‘rights’.

For example, some may not have voting rights, some may have first call on any profit, and some may only receive a benefit when the business is sold.

Debt finance

Debt finance is different in that the person who lends you the money doesn’t have any rights as far as the company management is concerned (in theory – but always read the fine print!). In some cases lenders can exert a significant amount of pressure depending upon the loan conditions. For example, they may say that they want a seat on the board of directors or they may be able to call the loan in if the company does something that they disagree with.

If you go to a bank and take out a standard loan to buy a new minibus, the only right that the bank has is to receive a monthly payment of capital and interest.

Short-term debt (up to 5 years) tends to come with less security checks, is less likely to be secured on property and generally costs more.

Longer-term debt (over 5 years) takes longer to organise due to greater security requirements like proving income over time, is usually secured on some asset and is usually cheaper.

All debt falls into one of these two categories but there are lots of different nuances involved and these depend upon the type of company that is borrowing, the type of lender and the purpose that the money is being used for. It is worth taking advice for your specific situation, and the bank you are seeking a loan from will often be able to give you specific advice on what will suit your goals.

Leases, HP and PCP

Leases, HP and Personal Contract Plans (PSP) tend to act like debt but they aren’t.

You make a monthly payment for the right to use an asset, but it’s important to remember that you never really own the equipment – unless it’s a rent-to-own contract, you are only renting it.

Even with a standard lease, you may get the opportunity to purchase the equipment at the end of the term, but be careful as the final payment in the case of PCP or an operating lease might be quite large.

Hire Purchase (HP) and finance leases work in exactly the same way but come with the automatic right to buy at the end of the term. The monthly payments will be bigger but you’ll be able to buy for either a nominal amount or a very small charge.

Often you will find that equipment providers will offer you the chance to finance a package of equipment through a lease.

The pros and cons of different types of financing

If you are seeking financing it is vital that you seek individual advice tailored to your own situation, but we’ve collated some of the top-line pros and cons of the different types of finance.

Overdrafts and credit cards

Very short-term financing that should be used only for short-term needs. They have high interest rates and are repayable on demand. Credit cards are good if you pay the balance off every month as it is usually interest-free and may come with additional benefits, but it is not a good idea to finance anything more than a month on a credit card or you’ll pay through the nose.

Term loans

These are better for financing slightly longer-term needs such as buying new equipment or refitting. They have a lower interest rate than overdrafts and you have a fixed monthly outgoing but they aren’t repayable on demand.

Mortgages

Mortgages are appropriate for longer-term purchases such as buying real estate or doing significant work like an extension. The interest rate will be lower and will be secured on the property but aren’t repayable on demand. They do take time to arrange and there will be fees involved.

Lease

Leasing is a really good way to buy short to medium-term assets like photocopiers, vehicles and equipment. The payments can often be lower than a loan and manufacturers will often offer cheap deals to sell goods but you don’t own the asset and you may not have the right to buy at the end of the term.

Share sale

Selling shares in a business is definitely worth considering when financing working capital. There is usually no interest payable and the person investing is essentially betting on the success of the company.

These are especially suitable where the person who invests has skills that the business could use.

The downside is that you are giving away a percentage of your business, a percentage of the profit through dividends and when you come to sell, they will also be entitled to some of the proceeds.

Next steps

Whatever you are planning to do, the first step is to produce or refresh your business plan. For anyone to invest in your business, they will want to know in great detail what your future plans are.

Make sure that you are able to share specifically what you want to do with the money and how you will make the payments.

It may be helpful to speak with your accountant and get a cash flow forecast made up. This will show whether the financing is an affordable and sensible thing to do.

Next, match the type of finance to what you are looking to do and approach lenders or investors. If you are looking for longer-term finance at higher amounts or equity financing, this is where your business plan and cash-flow forecast will be invaluable.

Try to speak to at least three sources of cash so you can compare them, and we’d also recommend talking over the decision with an independent business advisor. While the world of finance may seem intimidating at first, there are many people who would be happy to join you in reaching your goals.

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