So… what do you do when the banks won’t help? Whilst the first port of call with any business seeking financial help should be the bank, we often hear of issues and problems with getting the bank to come through with the necessary support to help a business. So, what other options are available for funding your business? In this short article we explore some of the main options available to help you grow.
Asset based finance
Essentially, this form of finance allows you to borrow against assets owned by the business. Leasing arrangements are mostly ‘rental agreements’ with the finance company, however, it may not be for the full amount that the equipment costs. This works in two ways; the lender either buys an asset from you and you rent it back (sale and leaseback) or you borrow against your asset but are still allowed to use it (secured borrowing).
Not for everyone, business angels can be very useful if you have a commercial idea supported by ambitious growth plans. Essentially, a business angel will provide private investment into the business. The added benefit of this approach is that you would hope to get not just money from the investor but their expertise and contacts. What needs to be remembered here though is that this comes at a price. Unlike a traditional banking relationships, a private investor is likely to require a substantial equity share in the buisness and in some circumstances, this may lead to a loss of control.
Enterprise Finance Guarantee
The Enterprise Finance Guarantee (EFG) is a loan guarantee scheme to facilitate additional lending to viable small and medium size enterprises lacking adequate security or proven track record for a normal commercial loan. It was introduced in 2009 and has had some mixed successes. Despite this, it is always worth putting this on the agenda. The Government provides the lender with a guarantee for 75% of the loan, for which the business borrowing pays a premium. Accredited bank lenders administer EFG and make all decisions on lending. The scheme should run until 2014-15 and is expected to facilitate freeing up £600 million of additional lending.
Export Enterprise Finance Guarantee
Similar to the above but focused on export: if your business trades overseas or is looking to enter new markets abroad, the Export Enterprise Finance Guarantee (ExEFG) scheme is designed to help.
The scheme is specifically aimed at giving small businesses that are unable to get a commercial export loan access to the credit they need to win overseas contracts by providing lenders with a 60% guarantee.
In the most basic terms, a grant is a sum of money awarded to help a business succeed in a particular project, for example starting a new business or developing a new product. Unlike a loan, they are generally not repayable and you pay no interest on the amount given, making them an attractive option for small businesses. Many grants exist, local, national and European grants have been attractive to early stage businesses in recent years. Grant application, whilst not difficult, requires careful navigation.
Invoice discounting/finance and factoring
Invoice finance or discounting effectively ‘frees-up’ the money tied up in a businesses unpaid invoices. However, you’ll typically only receive 80-90% of the face value of the invoice.
Factoring is slightly different in that it allows a business to sell your debt to another company. The factoring company pays you immediately and gets the money from the business’ customer when the invoice is due. For this, the factoring business will charge you a percentage fee.
Community Development Finance Institutions (CDFIs)
CDFIs provide loans and support to help people and businesses to create prosperity in their local communities. CDFIs are organisations that lend money to individuals, businesses, social enterprises and charities that find it difficult to borrow money from banks and building societies. Most CDFIs are based within the UK’s most disadvantaged communities. They provide loans and support to:
- Microenterprises (businesses with less than 10 employees)
- Small businesses (with 10-49 employees)
- Medium businesses (with 50-249 employees)
- Social enterprises, community organisations or charities
Important to note here is that CDFIs will normally only lend to customers who have been unable to get the finance they need from a regular bank.
Funding communities and Peer to Peer lending
Driven by innovation and the internet, funding communities offer a single, immediate source of information for different types of business funding, including many of those discussed above.
Another recent online development in funding is the introduction of peer-to-peer lending, which makes it possible for established, creditworthy businesses looking for loans of between £5k and £50k to find other businesses and investors who want to lend money.
As has been articulated, there are many non-tradtional routes to securing the financial support your business may need. Selecting the right one can present a challenge. Our starting point is even more simple, do you actually need the finance? For many businesses, a stronger relationship with the bank coupled with good financial management practices can obviate the need to take in additional finance.
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