Funding for businesses can be a minefield. Whether start-up or long-established, businesses can often benefit greatly from a capital boost. Historically the only option was to go to the banks, however nowadays the support both for start-ups and growing businesses is much more varied.
Bank funding still provides approximately 80% of the funding for businesses. Banks tend to be happy to support businesses in principle and have plenty of capital, which they can offer at relatively competitive rates. They are also highly cautious and risk averse, which can be a challenge, especially in the early stages.
Professional assistance can improve chances of success, both with banks and other lenders. We help businesses to put together sound business plans with all the supporting information a lender might ask for. Since a lot of the businesses we speak to are still unsure what alternatives are available to them, we’ve put together a breakdown of what main options are available beyond the high street:
Yourself
Ok, so we are stating the obvious here, but a lot of businesses start off by self-funding via their owners / directors. Most successful businesses started out by being funded by their own proprietor, and honestly, there is little chance of any lender taking a business seriously if their own owner isn’t willing to stump up some funds to see it succeed – why should they take all the risk? Starting funds from the founder are often known as the ‘hurt capital’.
Family and Friends
As those who would most like to see your business succeed, family and friends are the obvious first port of call. Having said that, make sure any financial transactions are done fairly, honestly, and officially – money can be the cause of huge fallouts, so it’s best to have some official terms of lending drawn up which cover both the lender and the borrower, and set out proper legal terms for repayment.
Start-up Loan Scheme
With banks sometimes swerving new businesses as they are too high risk, the government launched the start-up loan initiative which offers loans of up to £25000 per owner / director of a business that is either start-up, or less than two years old. The loans are offered at a discounted rate, usually around 6%.
Grants
The types of grants available depend on the growth plans for specific regions, and are usually provided through Local Enterprise Partnerships (LEPs). Grants can be available to fund part or whole projects which contribute to regional growth and can provide an excellent source of funding.
Crowdfunding / Peer-to-peer lending
Businesses can also borrow money directly from other businesses, crowds (formed of individuals), or peers. This kind of funding for businesses is usually done via the internet – the P2P lender site puts the borrower in touch with the lenders. Credit checks are completed both through agencies and also often through lenders’ own in-house systems. The good thing about this type of lending is that it can be done for relatively small amounts of money, and given the rise in its popularity over recent years, can now rival banks in terms of interest rates.
Regional lenders
Being Yorkshire-based, the two main local lenders to us are Finance Yorkshire and Business Enterprise Fund. Various government websites have breakdowns of the kinds of funding for businesses available and what businesses might qualify. It may not only be funding that is offered – training, business advice and financial support may also be on offer. Due to be launched in 2017 is the Northern Powerhouse Fund which we will keep our blogs updated on.
Invoice financing (Factoring & Invoice Discounting)
This kind of financing allows businesses to borrow against pending invoices, meaning they don’t have to bridge the financial gulf between the invoice date, and potentially 30 days or more later. The business effectively sells its invoices to what is called a factoring company. The invoice is sent, and payment is usually within 48 hours of up to 90% of the invoice total (different figures are offered by different companies). The factoring companies also take on the responsibility of chasing the payments, and only take payment for their own services once their client’s invoice has finally been settled.
The Late Payment Act dictates that bills must be paid within 30 days, but sadly this is not always the case. Invoice financing removes the risk (for a fee) of late payers having a detrimental impact on the company.
Invoice financing is available through banks, but also through independent lenders, for example Bibby’s, Ultimate, Skipton Business Finance, and the web-based Platform Black.
Asset-based lending
As its name infers, asset-based lending is where security for a loan is given in the form of high value assets. These might include cars, machinery, lorries and property. A mortgage is a prime example of an asset-based loan. There are a huge range of companies offering this kind of finance. Funds are released based on an agreed percentage of the value of the asset in question. With all loans of this type, the asset is at risk if repayment terms are not met, the lender reserves the right to recoup their lending costs by taking possession of the security assets.
Specialist Lenders
When the credit crunch hit in 2008, there arose a selection of specialist lenders who filled the gap left by the banks. Funds relating specifically to property development for example, whether for residential or commercial use, are offered by companies such as Shawbrook, Aldermore, Interbay and Cambridge & Counties.
Some lenders focus specifically on overseas trade, whilst some are purely interested in bridging finance. Bridging loan providers include Together, Lowry, Locally-based Reward & Bridgebank, as well as a huge range of independents, new ones of which are springing up all the time.
Equity
More commonly associated with high risk businesses with high growth potential, equity funding from business ‘Angels’ or Venture Capitalists can be an option. In these instances, funds are raised through investors raising funds in return for an equity stake in the business. This kind of funding was brought into mainstream understanding by the ever popular Dragons’ Den.
In summary, there are numerous options available to businesses looking for finance. It can be confusing and time consuming to find the best option, which is why professional advice, such as that given by the team at Red Sky, is usually the best option, and provides the most likely chance of success.
