If you talk to a business owner or read the business section of a newspaper, you will almost certainly come across stories about people struggling to get enough funding to grow or maintain their businesses.But we’re starting to see a change in how entrepreneurs get money. Many are now actively looking for other ways to get money.
A survey by the UK Forum of Private Business found that 26% of businesses were looking for alternative financial products, while 21% sought them outside of the traditional main high street lenders. In fact, another survey by the Federation of Small Businesses found that only 35% of respondents used a traditional overdraft facility in 2011.
So, if banks are persistently reluctant to lend to all but the lowest-risk businesses, how can the rest of the UK business population finance growth? Here are some of the increasingly popular alternative funding sources to explore.
Better working capital management
This may seem like an odd source of funding, but very often companies sit on undiscovered cash reserves that can be used to fund growth. A Deloitte report in 2011 found that the UK’s largest companies were sitting on £60 billion of unproductive working capital. Inefficiencies in handling working capital (debtors, inventories, and creditors) can unnecessarily lock up your money. Getting a closer look at credit procedures, how credit terms are given, and how outstanding payments are handled can unlock cash that can be used to fund self-funded growth plans.
Ensuring inventory is kept at optimal levels through better inventory management is another area where money can be freed up to support and fund growth. Look closely at your inventory management process and identify areas where cash is trapped.
Good working capital management is not just about better control of accounts receivable and inventory; it is also about maximising the terms set by accounts payable. Are you too eager to maintain a first-class relationship with your suppliers by paying well before the due date? You can positively influence your cash position by making optimal use of the terms and conditions of your suppliers. Have you taken full advantage of your position by looking for a comprehensive set of terms, from, say, 30 days to 45 days?
More efficient working capital management can free up sufficient resources to self-finance growth plans.
Personal Resources
With traditional funding channels becoming more difficult to access, business owners are now looking to their personal resources to fund growth. Whether it’s savings, using personal credit cards, or taking out additional home mortgages, such resources are an immediate solution. A survey by the Federation of Small Businesses found that 33% of respondents had used their savings to fund growth. In addition to being more readily accessible through personal means, it is often a cheaper source of funding.
relatives and friends
Sometimes referred to as the three F’s—family, friends, and fools—this can seem like a less stressful way to raise funds. In some ways, it can be, but it can also be a journey fraught with danger. Using their personal network, business owners can obtain financing by either seeking a loan and offering a higher interest rate than that on a high-street savings account or offering a portion of the equity in the business in return for investments.
Raising funds in this way can be relatively easy, as the request and fulfilment are based heavily on personal trust. Usually, a business plan is presented that emphasises both the investment opportunity and the risks, but ultimately, success depends on the depth of the relationship and the level of trust.
The danger of raising funds in this way is that the nature of the relationship changes from that of a personal one to that of a business transaction. Paying regularly on the agreed terms, or even not paying at all, can irreparably damage the relationship, so be careful.
asset financing
The asset finance industry is based on the concept of preserving cash or accelerating access to it. Asset financing, which consists of invoice discounting, factoring, and financing of asset purchases, has been available as a source of financing for many years, but is only now gaining recognition. Figures from the Asset Based Finance Association, a trade association that represents the industry, show that the amount financed by the members of the association increased by 9% in the third quarter of 2011 compared to the same period last year. While the increase may not seem significant, it is against the background of a decline in traditional bank lending.
In a world where cash is king, asset lenders help to save money by financing the purchase of assets such as vehicles, machinery, and equipment. Because the lender sees the underlying asset as security, there is usually no need for additional collateral. According to the Asset Finance and Leasing Association, one in three UK companies with external financing now uses asset financing.
Wealth lenders can help accelerate the flow of money within a company by providing faster access to cash tied up in the accounts receivable book. An invoice discount and factoring facility gives companies the ability to access 80% of an invoice immediately instead of waiting for the agreed credit terms to expire. They will help the company’s cash flow rate speed up, making it easier for the company to pay for big growth.
New players such as Market Invoice are entering the market to enable companies to raise financing against selected invoices. Tapping into high-net-worth individuals and funds The Market Invoice acts as an auction house, with financiers “bidding” to get advances on certain bills.
Crowfunding and peer-to-peer
A relatively new phenomenon is the concept of raising finance using the power of the crowd. The historically low interest on savings has led depositors to look for new ways to increase their returns. With entrepreneurs struggling to raise the necessary financing, it is only natural that a market be created to bring these two parties together.
CrowdCube entered the market in 2010 to match private investors looking to become Dragons with companies looking to raise capital. Once a company passes the first part of the process, their proposal is put up on the site. Potential investors can choose how much money they want to invest, with a minimum amount of just £10.
Companies looking for a more traditional loan may want to consider Funding Circle. Founded in 2010, Funding Circle also matches individual investors seeking better returns with companies seeking additional funding. Businesses can apply for financing of between £5,000 and £250,000 for 1, 3, or 5 years. The company must have filed and looked over its accounts with Companies House for at least two years in order to give investors a risk assessment.
As the concept of crowdsourcing matures, we will likely see more players enter this market to take advantage of the need for better investor returns and easier access to corporate finance.
There is more than one way to finance growth.
Accessing finance to fund growth plans doesn’t have to be difficult if you’re willing to look for alternative providers. Financing growth is no longer the exclusive domain of the traditional high-street bank, and it is now up to entrepreneurs to look for alternative routes.
