Are you looking to start a business, or in need of capital to expand? Here some alternatives to bank funding.
External finance
For most businesses, the principal source of funding has traditionally been in the form of overdrafts and fixed-term loans, which account for about 50% of all external finance.
The Bank of England has said that there is ‘no real evidence of firms having difficulties accessing bank finance’. However, the need for some form of security can occasionally result in even the most well-presented request for funding, accompanied by an impressive business plan, being declined. And with more than 40% of business funding being provided by hire purchase, leasing, trade finance, invoice financing, partners and shareholders, less than 10% is provided by venture capital sources.
Debt finance
Many lenders have developed ‘credit scoring’ techniques that assist them with small business funding applications. The determining criteria include:
- credit history
- past bank account management
- the applicant’s track record in business
- your willingness to invest your own money into the business
- evidence of repayment capability, based on a business plan
If you don’t have a previous business track record and have little or no capital, the application will focus on your ability and willingness to provide some form of security against the borrowing.
One possible source of guarantee for finance is the Enterprise Finance Guarantee, where the government will guarantee lending to viable businesses to ensure they can secure the working capital and investment they require.
This scheme provides a guarantee for lending from three months to 20 years, to UK businesses of up to £25 million. This scheme is intended to help businesses secure loans between £1,000 and £1 million, but will only be available until 31 March 2011.
Equity alternatives
Equity finance accounts for about 8% of external finance for small and medium-sized businesses. Those companies that do attract this type of funding tend to be highly innovative and have a prospect of good growth.
According to 97% of respondents to the government’s ‘Bridging the Finance Gap’ consultation, there is still a significant lack of equity finance available, but this is a source of funding that looks set to increase in the future.
Business angels and informal investors
There are said to be 20,000 to 40,000 angel investors in the UK, putting between £500 million and £1 billion per annum into between 3,000 and 6,000 businesses.
An InvestorPulse survey showed that in 2002, 75% of angel investors made investments of less than £50,000, with an overall average investment of £35,000.
Enterprise capital funds
The government has announced its intention to launch a series of ‘pathfinder’ funds, based on the US-style ‘Small Business Investment Company’ (SBIC) model. These are to be known as ‘Enterprise Capital Funds’ (ECFs), and will involve the government offering debt at a favourable rate of interest to privately owned and managed funds. An ECF would then be able to access private funds and offer these pooled funds to UK businesses.
Raising finance – the essentials
- Choose the right lender – Learn about the various sources of finance and select those best suited to your purpose. If in doubt, get help.
- Provide the lender with the right information – Make sure that you fully understand the information that the bank (or other financier) requires. This often means much more than basic financial projections. A financier usually needs to gain an appreciation of the business, the quality and depth of management and the key people involved.
- Get professional advice – It is best to use the services of a professional when preparing and presenting your proposal. We can help you prepare a solid, detailed business plan that will attract financial support, and perhaps identify potential financiers who will meet your needs.
A well-prepared proposal that is presented to a carefully chosen lender will have a greater chance of success. It is worth investing enough time, preparation and effort to get it right.
By Christina Nawrocki of Wellers Accountants, www.wellersaccountants.co.uk
