There is plenty of support available for start-ups and growing SMEs seeking financial support outside of the banks. In fact, there are more options for finance than ever before from equity-based crowdfunding to peer-to-peer loans and invoice finance to name but a few. Having said that, the more traditional banking route for raising finance may well be a more viable option for established businesses who can demonstrate track record and sound financials.
Still a lot of small business owners (56% of SMEs) remain unclear about what alternative methods to fund investment or expansion are available to them. Here are some of the main options:
SMEs are able to borrow directly from other organisations and individuals or ‘peers’. If you want to borrow money, the peer-to-peer lender’s website put you in touch with people who will lend it to you. A credit check with a credit reference agency will be completed as well as an in house credit application. Some websites have no minimum loan amount which may suit if you only wish to apply for a small amount. Interest rates have improved dramatically in recent years and now compare favourably with those offered by banks.
The government has put together a great list of various schemes and programmes for SMEs around access to finance, business advice and other finance support. Watch this space for the new Northern Powerhouse Fund which is due to be launched later this year.
Invoice financing (Factoring & Invoice Discounting)
This form of funding is where a business ‘sells’ its invoices to a factoring company. We all know how long it can take for invoices to be paid. Even when agreed payment terms are set out in the contract before any work is carried out, and even though the Late Payment Act requires clients to pay up within 30 days, businesses are often left waiting beyond this deadline. Imagine then if an invoice is sent off and within a matter of hours the money reached your account. Well that’s pretty much how it works with invoice financing. The factoring company generally will provide a percentage up to 90% of the invoice total. With factoring, they will also take over the responsibility of chasing the payment, taking their fees for their work when the invoice is finally paid.
Asset-based lending, as the name suggests, is a business loan secured by assets usually items such as vehicles, plant & machinery etc. In this sense, however, a mortgage is an example of an asset-based loan. A large number of financial service companies offer this form of finance. Lenders will advance funds based on an agreed percentage of the secured assets value. If the borrower defaults the lender has the ability to seize the asset and attempt to recoup their lending costs.
There is a host of specialists which plugged the gap vacated by the banks following the credit crunch which provide finance for such matters as property development and property investment finance (residential, commercial and semi-commercial). There are also lenders specialising in bridging finance and the finance of overseas trade.
Start Up loans
The Start Up Loan scheme is a government funded scheme that funds and mentors new businesses and those which have been trading up to 24 months. You will need to check to ensure you are eligible and ensure you have a robust Business Plan and Cashflow Forecast in place which will support your application. Loans up to a maximum value of £25,000 over between 1-5 years at a fixed interest rate of 6% p.a. There is no application fee and no early repayment fee.
In certain instances – usually higher risk/high growth situations – equity funding from a Business Angel or Venture Capital house is a more appropriate option.
Alternative lenders are prepared to consider SME’s on a case-by-case basis. An increasing number of businesses are now looking away from the banks and considering the services offered by the alternate finance market. Having said that, the high street players still dominate the SME finance market and provide over 80% of all funding.