Talk to any business owner or read the business section of any newspaper and you are likely to come across stories about the difficulty of getting enough capital to grow or sustain their business. But we are starting to see a change in the way business owners access capital, and many are now actively seeking alternative sources.
A survey by the Forum of Private Business found that 26 per cent of businesses were looking for alternative financial products and 21 per cent were looking for them outside the traditional main high street lender. In fact, a separate survey conducted by the Federation of Small Businesses found that only 35% of respondents used a traditional overdraft facility in 2011.
So if banks have been reluctant to lend to all but the lowest-risk businesses, how does the rest of the UK’s corporate population fund growth? Here are some of the increasingly popular alternative funding sources to investigate.
Better management of working capital
This may seem like an odd source of money, but companies often have undiscovered cash reserves that can be used to fund growth. According to a 2011 report by Deloitte, the UK’s biggest companies have £60bn of unproductive working capital. Inefficiencies in the way working capital (debtors, shares and creditors) is handled can tie up your cash unnecessarily. Cash can be unlocked and released back into the system to enable self-financing growth plans by carefully studying credit procedures, how credit terms are granted and how outstanding payments can be claimed.
Ensuring inventories remain at optimum levels through better inventory management is another area where cash can be freed up to support and finance growth. Take a close look at your inventory management process and identify areas where cash is trapped.
Good working capital management is not only about better control of debtors and shares, but also about making the most of the terms offered by creditors. Are you too eager to maintain first-class relationships with suppliers by paying well before due date? You can positively impact your cash position by taking full advantage of the terms offered by your suppliers. Are you making the most of your position by seeking broad terms from 30 to 45 days?
More efficient management of working capital can free up sufficient funds for self-financing growth initiatives.
With traditional sources of financing harder to come by, business owners are now turning to their personal resources to finance growth. Whether using cash savings, using personal credit cards or taking out additional mortgages on residential property, these sources are instant solutions. A survey by the Federation of Small Businesses found that 33% of respondents used their savings to fund growth. In addition to using personal resources more directly, it is often a cheaper source of funding.
Relatives and friends
Sometimes referred to as the three FS — family, friends and fools — it seems like a less stressful way to raise money. In some ways it can, but it can also be a journey full of dangers. Using their personal network, business owners raise money by seeking loans and offering interest rates higher than those offered on high street savings accounts, or offering an equity stake in the business in return for investment.
It’s relatively easy to raise money this way, because requests and fulfillment are largely based on personal trust. A business plan is often presented that highlights investment opportunities and risks, but ultimately success depends on the depth of the relationship and the level of trust.
The danger of raising money in this way is that the nature of the relationship changes from personal to commercial. Failing to make regular payments on agreed terms, or even not paying at all, can irreparably damage the relationship, so proceed with caution.
The asset finance industry is based on the concept of cash retention or accelerated access to cash. Asset finance, which includes invoice discounting, factoring and asset purchase finance, has been a source of finance for many years but is only now gaining more recognition. Through the third quarter of 2011, members raised 9% more money than a year earlier, according to the Asset Base Finance Association, a trade association representing the industry. While the increase may not seem significant, it comes against the backdrop of a decline 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 financiers treat the underlying assets as safe, they usually do not need additional collateral. According to the Asset Finance and Leasing Association, a third of businesses in the UK with external finance are now using asset finance.
Asset financiers can help speed up the flow of cash within businesses by allowing faster access to cash on debtors’ books. Invoice discounting and factoring capabilities give businesses immediate access to up to 80% of their invoices, rather than waiting for agreed credit terms to start working. Such financing facilities will speed up the flow of cash within companies, thus enabling companies to finance high growth.
New players such as Market Invoice are entering the Market to allow companies to raise capital based on selected invoices. Using high net worth individuals and a fund, Market Invoice, as an auction house, funders “bid” to advance certain invoices.
Crowdfunding and peer-to-peer
A relatively new phenomenon is the concept of raising money by harnessing the power of the masses. Historically low interest rates payable on savings have led savers to look for new ways to increase returns. As business owners struggled to raise the money they needed, it was natural to create a marketplace to bring the two together.
CrowdCube entered the market in 2010 with the aim of matching private investors seeking to become dragons with those seeking to raise capital. Once businesses have passed the preliminary vetting stage, their proposals are posted on the website and potential investors indicate the level of investment they wish to make, with a minimum of as little as £10.
Companies looking for more traditional loans should consider Funding Circle. Funding Circle, founded in 2010, also matches individual investors looking for better returns with businesses looking for additional Funding. Companies can apply for between £5,000 and £250,000 over a period of one, three or five years. As a minimum, companies must submit accounts to the company for two years and evaluate them to meet a risk rating that guides potential investors.
As the concept of crowdsourcing matures, we are likely to see more players enter the market to take advantage of the demand for better investor returns and easier access to business financing.
There is more than one way to finance growth
If you are prepared to look for alternative suppliers, it is not necessarily difficult to obtain funding to fund growth initiatives. Capital growth is no longer the preserve of traditional high street banks and it is now up to business owners to find alternatives.