Talk to any business owner or read the business section of any newspaper, and you’re likely to come across stories of struggles to access sufficient finance to grow or maintain their business. But we are beginning to witness a change in how business owners access to finance, with many now actively seeking out alternative sources.
A survey carried out by the UK’s Forum of Private Business found that 26% of businesses were hunting out alternative financial products, with 21% seeking them outside of the traditional main High Street lenders. In fact, in another survey undertaken by the Federation of Small Businesses, it was discovered that only 35% of respondents used a traditional overdraft facility in 2011.
So, if banks are continually reluctant to lend to all but the lowest risk businesses, how can the remainder of the UK’s business population finance growth? Here are some of the increasingly popular alternative sources of finance to investigate.
Better Management of Working Capital
This may appear to be an odd source of finance, but businesses are often sitting on undiscovered cash reserves, which can be used to finance growth. A report issued by Deloitte in 2011 revealed that the UK’s largest businesses were sitting on £60 billion of unproductive working capital. Inefficiencies in handling working capital (debtors, stock, and creditors) can unnecessarily tie up your cash. Cash can be unlocked and released back into the system, allowing self-financed growth plans by taking a close look at credit procedures, how credit terms are granted and how outstanding payments are chased.
Ensuring that stock is kept at an optimum level via better inventory management is another area where cash can be released to support and finance growth. Take a good look at your inventory management process and identify areas where cash is trapped.
Good management of working capital is not just about better control of debtors and stock; it is also about maximizing the terms given by creditors. Are you too eager to maintain a first-class relationship with your suppliers by paying well before the due date? You can positively impact your cash position by taking full advantage of the terms offered by your suppliers. Have you fully leveraged your position by seeking an extensive of terms from say 30 days to 45 days? Being more efficient in how working capital is managed can release sufficient funds to self-finance growth plans.
With traditional avenues of funding being more difficult to access, business owners are now looking to their personal resources to fund growth. Such sources are an instant solution, whether drawing on cash savings, using personal credit cards or taking additional mortgages on residential properties. A Federation of Small Businesses survey found that 33% of respondents had utilized their savings to fund growth. As well as being more immediately accessible using personal resources is often a cheaper source of finance.
Family and Friends
Sometimes referred to as the three F’s – family, friends, and fools – this can appear to be a less stressful way of raising finance. In some ways, it can, but it can also be a journey fraught with danger. Tapping into their personal network, business owners source finance by either seeking a loan and offering to pay an interest rate higher than that on offer on a High Street savings account or offering a slice of equity in the business in return for investment.
Raising finance in this way can be relatively easy because the request and fulfillment are based on personal trust. Typically a Business Plan would be presented highlighting both the investment opportunity and the risks. Still, success is down to the depth of the relationship and level of trust at the end of the day.
The danger in raising funds this way is that the nature of the relationship will change from that of a personal nature to a business transaction. Failure to regularly pay as per agreed terms, or even total failure to pay, can irreparably damage the relationship so tread with care.
The Asset Finance industry is based on the concept of either preserving cash or speeding up access to it. Asset finance, which consists of invoice discounting, factoring, and funding of asset purchases, has been available as a source of finance for many years. Yet, it’s only now gaining more recognition. Figures released by the Asset Based Finance Association, a trade association representing the industry, show that in the third quarter of 2011, the amount financed by the Association’s members increased by 9% compared to the same period in the previous year. Whilst the increase may not seem significant, it is against the backdrop of a fall in traditional bank lending.
In a world where ‘cash is king’ assets, financiers help preserve cash by financing the purchase of assets such as vehicles, machinery, and equipment. Because the financier is looking to the underlying asset as security, there is usually no requirement for additional collateral. According to the Asset Finance and Leasing Association, one in three UK businesses that have external finance now utilize asset finance.
Asset financiers can help speed up cash flow within a business by allowing quicker access to cash tied up in the debtor book. An invoice discounting and factoring facility allows businesses to immediately access up to 80% of an invoice instead of waiting for the agreed credit terms to run their course. Such finance facilities will speed up the velocity of cash within the business, thereby allowing the business to fund a high growth rate.
New players such as Market Invoice are entering the market to allow businesses to raise finance against selected invoices. Market Invoice acts as an auction house with funders ‘bidding’ to advance against certain invoices by tapping into high net worth individuals and funds.
Crowdfunding and Peer-to-Peer
A relatively new phenomenon is the concept of raising finance by tapping into the power of the crowd. The historically low rates of interest payable on savings have led to depositors seeking out new ways to increase their returns. With business owners struggling to raise the funding they need, it’s only natural that a market would be created to bring these two parties together.
CrowdCube entered the market in 2010 to match private investors seeking to be Dragons with those businesses looking to raise capital. Once a business passes the initial review stage, its proposal is posted on the site. Potential investors indicate the level of investment they wish to make, with the minimum amount as low as £10.
Businesses looking for a more traditional loan should consider Funding Circle. Established in 2010, Funding Circle also matches individual investors looking for a better return with those businesses seeking additional finance. Businesses can apply for funding between £5,000 and £250,000 for a period of 1, 3, or 5 years. As a minimum, the business has to have submitted two years of Accounts with Companies House and be assessed to arrive at a risk rating that guides potential investors.
As the crowdsourcing concept matures, we are likely to see more players enter this market to capitalize on the need for better investor returns and easier access to business finance.