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 finance with many now actively seeking out alternative sources.
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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 very often businesses are 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 how working capital
(debtors, stock and creditors) is handled can unnecessarily tie up your cash.
Cash can be unlocked and released back in to the system thereby allowing self-financed
growth plans by taking a close look at credit procedures, how credit terms are
granted and how outstanding payments are chased.
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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 maximising 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 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.
Personal
Resources
With traditional
avenues of funding being more difficult to access business owners are now
looking to their personal resources to fund growth. Whether it be drawing on
cash savings, using personal credit cards or taking additional mortgages on
residential properties, such sources are an instant solution. A survey by the
Federation of Small Businesses found that 33% of respondents had utilised 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.
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Raising finance in
this way can be relatively easy because the request and fulfilment is very much
based on personal trust. Typically a Business Plan would be presented
highlighting both the investment opportunity and the risks but at the end of
the day success is down to the depth of the relationship and level of trust.
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.
Asset
Finance
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 to 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' asset 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 utilise asset
finance.
Asset financiers can
help speed up the flow of cash within a business by allowing quicker access to
cash tied up in the debtor book. An invoice discounting and factoring facility
gives businesses the ability 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 rate of growth.
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New players such as
Market Invoice are entering the market to allow businesses to raise finance
against selected invoices. Tapping into high net worth individuals and funds
Market Invoice acts as an auction house with funders 'bidding' to advance
against certain invoices.
Crowfunding
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 their proposal is posted on the site and potential investors indicate the
level of investment they wish to make with the minimum amount being as low as
£10.
corporate finance
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 Accounts with Companies
House and be assessed in order to arrive at a risk rating which guides
potential investors.
As the crowd sourcing
concept matures we are likely to see more players enter this market to
capitalise on the need for better investor returns and easier access to
business finance.
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