What Does It Cost to Start an Asset or Commercial Finance Brokerage in 2023?
We are becoming accustomed to rising costs in our personal lives, but what impact has rising inflation had on the costs of setting up a finance brokerage? In our earlier articles, we outlined the importance of ensuring that you have enough cash available to tide you through your initial trading period and cover your day-to-day living expenses, but what about the costs of establishing the business itself? In this article, we outline some of the major expenses that you will incur and discuss the options for funding them.
Registering your Company
The type of company you decide to set up, (Ltd company, sole trader, partnership, etc.), will define the process you follow for naming and registering your company. For a Ltd company, this can be done online and costs £12, which can be paid by credit or debit card. Paper registrations will incur a higher fee of £40. A full step-by-step guide on company registration can be found on the UK government website: Set up a limited company.
You may also choose this point to register a domain name for your emails and hosting. Sites such as GoDaddy allow you to choose your domain name and set up your email address. If you anticipate needing a website during the first year, purchasing your domain name and hosting as a package may come with additional benefits such as free email addresses. Prices for the domain name will depend on availability/popularity and if you are already a Go Daddy customer or not (there are sometimes offers available on purchasing your first domain name). You can find out more about GoDaddy on their website www.godaddy.com.
FCA Authorisation and Annual Fees
If you are registering directly with the Financial Conduct Authority (FCA), you will need to pay an initial registration fee. For most intermediaries, this fee falls under band four, approximately £2,500, which can be paid online using a credit card. Additionally, an annual fee is due on an ongoing basis, which is pro-rated in your first year. You can find more information about FCA authorisation and associated fees on the FCA website.
Consultancy Services, CPD and Memberships
Registering with the FCA is just the start of an ongoing need to comply with regulation. To do this you will need to keep up with any regulatory changes and how they apply to your particular business. You will also need to evidence your compliance, demonstrating that you have acted in the best interest of your clients. If you have gone for direct authorisation, then you may need to seek specialist advice on this topic. Two avenues exist for staying current with regulation engaging a consultancy service (on either a package or pay as you go basis), which range between £60 and £500 per month, plus a one-off audit fee of approx. £3000 a year. Alternatively, you could get updates via the NACFB. Single membership to NACFB costs £65 per person per month, however this provides general regulatory updates and does not include systems of record or audits.
Premises, Energy, Travel and Telecoms Costs
As a new startup business, it is highly likely that you will choose to work from home, either entirely or partially. Setting up a private space with adequate lighting, heating, and ventilation is essential for a comfortable working environment. You may also want to consider adding an additional landline or mobile specifically for business purposes to create a separation between your work and personal life. Ofcom, cites the average monthly mobile phone bill as £45.60, though better deals may be available if you package your internet, mobile and landline together.
It’s important to update both your home office and motor insurance providers about your working situation, especially if you have made modifications to your property, such as adding an outdoor building as a dedicated place of work. StartUps magazine estimate office set up costs ranging from as low as £1,900 to as high as £19,000 in 2022, depending on individual preferences and circumstances. This reflects everything from a simple corner desk unit in an existing space, to converting or creating a dedicated space with an outdoor building, loft or garage conversion. It is important to note larger projects may require planning permission and have an impact on the value of your home.
Don’t forget to factor in ongoing running costs, such as increases in gas and electricity consumption. Additionally, there may be increases in home and car insurance premiums to consider.
Professional Indemnity Insurance
Professional Indemnity Insurance is crucial for anyone providing a professional service, including finance brokers. It covers risks such as negligence, infringement of intellectual property rights, defamation, breach of confidence, and in some cases, data breaches and cyber security threats. Due to an increasingly litigious society and the rise of claims management firms, the cost of Professional Indemnity Insurance has soared in recent years.
Costs will vary depending on the level of coverage but for a business sub £100k turnover you can expect to pay £300 per month. It is essential to shop around for the best deal as premiums can vary depending on the provider and the limits of coverage provided. Premiums can be paid annually or monthly, although monthly payments often incur additional costs for credit, making it more expensive in the long term.
IT Equipment and Software Costs
The cost of IT hardware will depend on individual requirements and preferences. Factors to consider include PC specifications and peripheral. Expect to pay £900 -1,200 for a mid-range laptop with supporting peripherals which include mouse, keyboard, monitor, headset and printing /scanning capabilities.
In addition to the hardware there are software costs, which will include basic office applications such as those included in Microsoft 365, CRM to manage data and clients, some sort of application processing and quoting software and access to a credit referral system. Investing in antivirus software and backup devices are also crucial for business resilience. Together these are in the region of £1,500 – £2,000 per user per year.
In addition to backup, you may also want to think about how your IT is supported. IT support services for a small business on a pay-as-you-go basis charge between £50 and £80 per hour with a one-hour minimum. In most cases, they will give you a discount of 5% to as much as 20% on their hourly rates if you purchase and pay for a block of hours in advance. They may also charge you call out and travel fees.
IT costs can be divided into start-up and ongoing expenses, with a typical annual spend averaging around £3,500.
In Conclusion
The cost of setting up an asset or commercial finance brokerage varies depending on multiple factors. Many of these costs can be paid with credit cards or broken down into monthly payments, but it’s important to consider that paying over-time often incurs additional costs for credit, inflating the total amount paid in the long run.
Apart from shopping around for competitive pricing, it’s worth exploring alternative options such as joining a network or franchise model, which eliminates the need for direct authorisation by becoming an Appointed Representative of a Principal firm. Costs and offerings of network and franchise models vary, and may include software, indemnity insurance and other benefits, which work out cheaper than you procuring each element yourself individually, due in part to their superior purchasing power. Networks may also allow you to pay their fees on a monthly basis, without an added cost for credit, thereby reducing the initial start-up cost for your business.
Besides the cost efficiencies that they can offer, networks can provide a lot of added value by giving you access to funders and sharing specific industry, market and business knowledge. Not all networks offer the same services or operate the same fee model so be sure to conduct a thorough analysis of what is on offer before you commit.
Asset Finance Solutions and Synergy Commercial Finance are networks that promote excellence in asset and commercial finance broking. Our “Broker in a Box” solution has been fast-tracking the start of new finance brokerages for nearly 20 years. If you have been working in asset or commercial finance for three years or more and are considering setting up your own business, we would be happy to share our expertise with you.
