The funding landscape
Access to finance is crucial to the growth of the small business sector, which has a combined annual turnover of £1.9 billion, so where should you go for this money?
Traditionally, the usual source of finance for a business was bank loan but things have changed dramatically over the past decade.
The devastating financial crisis resulted in many institutions becoming reluctant to lend. While problematic, it’s helped the development of alternative sources of funding.
We have also seen the emergence of so-called challenger banks, according to Ian Walters, managing director of business banking at Metro Bank.
“We’re committed to supporting businesses across the UK,” he says.
“For the second consecutive year, we have pledged £1 billion net lending to SMEs, helping businesses to expand, recruit and innovate.”
Work out your funding requirements
According to Denise Friend, partner and founder of Friend Partnership, which advises businesses, there are a number of areas to consider when it comes to financing growth.
“You need to make sure you have a sound and coherent business plan that sets out why people should lend to you, what you need it for, and how you plan to repay it,” she says.
It’s also important to build a little extra working capital into your forecasts in case there are unexpected problems along the way.
This could include how your cash flow would be affected if a customer is slow to pay or you don’t hit the expected sales targets.
“Get the right sort of finance for each area of the business,” she adds.
“For example, vehicles should be leased not bought, and asset finance used for plant and machinery. Key to this is making sure that the finance matches the expected useful life.”
Business finance is an area that has grown substantially over the last few years, according to Emma Jones, founder of Enterprise Nation, the business support group.
“There are now so many options,” she says. “This is great for small business owners as it means there are plenty of channels through which to raise funds.”
The key is doing your research on each area. “Many start with crowdfunding which is a great way to secure funds and profile,” she adds.
For example, you may be drawn to angel investors, which are usually affluent individuals that provide capital in exchange for a share of ownership.
“You also have working capital from the likes of MarketInvoice and IWOCA, and peer-to-peer lending such as Funding Circle,” says Jones.
“There’s also your business bank.”
Of course, there are pros and cons to each approach. For example, if you’re taking out a loan you need to be wary of when you have to pay it back – and how much it will cost.
“Money doesn’t come for free so if you’re raising money through releasing equity in your company, be wary of how much you’re offering and to whom,” adds Jones.
The key, she suggests, is treating a business partnership as seriously as you would a marriage and use websites such as FundingOptions.com to help determine which meets your needs.
“Look at the terms and conditions before agreeing to deals,” she adds. “It can be better to look for money when you don’t need it, as you’ll be in a better negotiating position.”
The concept is to reinvest profits into your business and expand gradually. The obvious benefit is that this option won’t cost you a fortune in interest.
However, the downside is that growth is likely to be slow – especially when you consider that most businesses take a few years to actually break even.
Although organic growth is arguably the most sensible option initially, once your venture shows signs of promise you’re likely to need a better source of finance.
Support from family and friends
If you have wealthy and supportive family members and friends this can seem like the obvious solution.
They lend you money – either free or at a low rate of interest – and enable you to crack on with your project.
However, what happens if your plan fails? Will it cause a major rift if you can’t return their original investment, let alone make them a profit?
An increasingly popular choice. The concept is all about raising small amounts from a larger number of people.
However, the term covers a variety of methods, including peer-to-peer lending, where a business borrows money from a collection of lenders and pays it back with interest.
There is also equity crowdfunding. While broadly similar to peer-to-peer approaches, investors take shares in the business instead of repayments for a loan.
This is a way of borrowing based on what you’re owed by customers. In exchange for paying a fee, you will receive most of what you’re owed earlier.
This means that you’ll be able to put this money to use rather than having to wait anything up to 90 days – or more in some cases – for invoices to be settled.
As anyone will tell you, cash flow is the lifeblood of any business and you may feel it’s the best option to swallow a charge to ensure money is in your bank account.
This type of lending can be defined in a couple of ways.
The first is providing access to business assets such as machinery, which can be a cost-effective alternative to buying them outright.
An example is hire purchase, where you spread the cost of the items over time by paying in regular instalments.
The second definition is asset refinancing, which is where loans are secured against valuable items that a business owns, such as buildings and vehicles.
There have also been a number of SME funding platforms emerge whose objectives are to bring together lenders and those needing a financial injection.
An example is the one operated by the Federation of Small Businesses that puts its members in front of potential sources of funding.
According to Dave Stallon, the FSB’s commercial director, technology is a great enabler that has helped provide a great foundation for the platform.
“The platform is a good example of how automation and AI (artificial intelligence) can be utilised as a tool that increases efficiency, because it allows getting the ‘right human being’ in front of the customer at the right moment,” he says.
Banks with dedicated relationship managers can not only provide sources of funding but also support as your business grows.
Those with a broad range of products and services are in a good position to help, agrees Ian Walters, managing director of business banking at Metro Bank.
“Banks that put in the time to understand the people behind the business and their vision, are often best-placed to support their lending requirements,” he says.
Summary of your options
The fact is there’s no simple, one-size-fits-all solution when it comes to business funding. It all depends on the type of business and the longer-term goals.
The best advice is to ask around, suggests Emma Jones of Enterprise Nation.
“Surround yourself with support from peers who’ve been there and done it, as well as professionals such as lawyers and accountants,” she says.
Source: Love Money