Seek and ye shall find… eventually
The landscape of business finance has changed dramatically over the last few years. Banks and public institutions are under public scrutiny and the days of a friendly bank manager who understood your business and made individual arrangements are well and truly gone. ‘Lending criteria’ are the words that have swiftly crept into their vocabulary and some are more stringent than others. Achieving funding today is almost wholly dependent upon a sound business plan and, in most cases, the last three years’ worth of trading history, accounts, and future bookings or orders.
All funding options will depend upon whether you are a new business (start-up or fledgling) or established, as will your options. It will also depend upon how much you are seeking to borrow and for how long. Other factors that influence your options and therefore sources of lending will be governed by your asset base (whether they are personal assets like a house or property, or business assets like stock, plant, and machinery), and your will-ingness to dilute or sell your shares.
Compromise: sourcing the right funding method is almost always an exercise in balancing competing factors
If you are in a start-up situation, then you have a number of additional sources not always available to existing businesses. The obvious sources of friends and family having been exhausted, there are a number of government schemes aimed at encouraging start-ups. These vary by name and format on what seems like a monthly basis, but the internet will source you a number of government sites that outline and explain schemes available and qual-ifying criteria they are looking for. These will range from charitable institutions through to government-backed or led programmes, designed to boost the UK economy by allowing tax breaks or ‘soft loans’—lower interest rates with more lenient payback criteria—through to loan guarantees, grants, and access to business funding.
In the current economic climate money is harder to come by but available from the right sources”
You will also be of interest to some venture capitalists—usually a group of high net worth individuals looking for a better return than they are achieving having their money in the bank—and business angels, often a group of entrepreneurs with a pool of money they are looking to grow through investment. You will also attract seed enterprise investors, who typically run their own companies and get tax relief for investing in other UK businesses.
Existing business owners likewise have some advantages over start-ups, in that they can show a track record or trading history, which helps mitigate the risk in the eyes of certain lenders, and will have stock, orders, and pipeline potential, all of which can be used to leverage finance and in some cases used as security.
Investment finance
Investment finance, sometimes known as equity finance, involves selling part of your business through shares to an investor. Simply put, they will take a share of any profits or losses that the company makes. While this route can often add their skill and expertise to your business and means you have no ‘loan’ to repay or interest to find, you will own a smaller part of your business and may have to consult them before certain decisions can be made. It is also only available to limited com-panies, so sole traders and partnerships will have to look elsewhere.
With interest rates as low as they are, investors will look at most ideas that will generate a better return
Lons from family and friends, other businesses, banks, and community development finance institutions (CDFI) are possible. CDFIs are non-profit organisations that lend money to ndividuals, businesses, social enter-prises, and charities that can use the money to help develop their local community, so may or may not be suitable for you. The big advantage here is there is no loss of ownership and loans agreed cannot suddenly be made payable on demand—as might overdrafts. The biggest hurdle here is that banks, despite incentives and encouragement from central govern-ment, are being cautious and their ‘criteria’ for lending has tightened up. Government-backed schemes are more readily available, but again can be a time-consuming process where funding is needed fairly quickly.
Other sources
Debt factoring and invoice discounting can both be used as sources of additional finance. These can be a good way to boost cash flow and as a short term cash injection, but the trade-off is the ‘hit’ against profits. Grants are still available from the government, the European Union, as well as local councils and charities. While they are often viewed as ideal because there is no need to repay a grant, there is a lot of competition and they are almost always awarded for a specific purpose or project, which may or may not fit your own circumstances. Overdrafts can be useful for short-term projects but rarely available or cost-effective for long-term requirements.
Criteria for lending are tougher but with the right business plan can be achieved”
Increasingly, because the traditional institutions are making it harder to access business funding, alternatives are appearing. One of the most popular is crowdfunding, which is also known as crowd financing or crowd-sourced capital. This involves a number of individuals each investing, lending or contributing smaller amounts of money towards your business or idea. This will then be pooled to reach your fund-ing target, often with your idea being showcased through a crowd-funding website. The main disadvantage has been the fact it is unregulated, but that is set to change by the middle of this year.
Whichever route you select will have advantages and disadvantages; the decision you need to make will depend upon your own individual case. If you can secure the perfect amount, for the perfect duration, at the perfect rate, be thankful—you will have stumbled upon nirvana. Modern business folk have learned that life is full of comp-romise and as long as it is one you can live with, it might be the right one for you. Set down on a sheet of paper what you want ideally and then match up the sources of finance that allow you to achieve your goals. Sometimes there is a clear match but often a little flexibility will allow you to achieve what you need, even if it is not as perfect as you would have liked. If it still stacks up then go for it.