Clearly these challenges to raise the necessary capital are not all external; the entrepreneurs are not without responsibility in their lack of funds. Typically, some SMEs have, over time, displayed poor management as well as a poor maintenance culture of their current facilities. This has hampered their ability to raise and retain finance.
So, what are your options when considering raising finance?
High street banks. These are the primary source of funding for start-ups’ financing debt. In recent years there has been a perception that banks do not lend any more, which has led to the introduction of alternative sources of finance. However, banks are certainly open for business, with sufficient area funding and bespoke solutions available for SMEs who have sound business ideas, direction and strong support teams.
Asset Finance. Hire/Lease Financing allows equipment to be purchased without the need for a large capital outlay from a limited cash resource. This provides flexibility to utilise cash resources efficiently to fund the current business operations or to ensure sufficient working capital exists to take on further contracts. However, this is unlikely to be an option for most start-ups looking at raising finance, but one to be considered further down the line.
Invoice Finance. Invoice financing enables the release of funds currently tied up in outstanding customer invoices, ideal for providing a cash flow injection for working capital management. This area of lending has become much more competitive, creating a much more affordable and flexible way of financing for your business, with agreements normally built around a 30 day rolling contract. The main types are: factoring, discounting and spot discounting.
Crowd Funding and P2P Lending. Generally online platform based lending, enables many small lenders to pool their cash investments together, giving enterprises an alternative pool of finance to banks. These funding pools will still set out to match their own risk criteria with that of the business seeking funds, and ultimately the returns required on those funds invested.
The Business Angels. Very diverse in the UK, this type of funding reflects a range of models and approaches, such as angel networks, small groups and syndicates, and is ideal for business owners looking for more than a funding solution, but also for strategic support and contacts.
Venture Capitalists and Private Equity. Essentially capital finance provided in return for an equity stake in potentially high growth companies.
Business Grants. This is a highly overlooked source of funding and broadly fits into one of three categories:
- Government grants
- European grants
- Local grants
Friends and family. The cheapest form of finance, but with potential problems which may affect long-term relationships.
Other methods. Commercial mortgages, mezzanine finance and, that all important, working capital management.
If you are looking at raising finance it is important to be aware that a poor credit score, a lack of personal guarantees and a poor financial management history, are serious barriers for business owners looking to secure funding. Furthermore, the business model or indeed the individual may be deemed a high risk due to a lack of trading history or sufficient asset base.
A high proportion of applications are turned down by banks, but mainly due to a lack of clear direction by the business owners or even a poorly assessed management support network. Understanding the requirements of lenders and being open to the range of finance options will enable SMEs and start-ups’ to overcome these financial hurdles.
Because of the Economic downturn globally in 2008, lenders have had to become more responsible, thorough and forensic, and will now conduct their full due diligence. Alternative lending providers are competing with traditional mainstream bank lending facilities and offer much wider assessment criteria and measures.
How to assess your own viability: -
The business idea and plan
Investors and loan providers will want to review the business idea and plans, and assess the likelihood of profitability and return. A continually updated business plan is therefore essential.
Matching a lender to your own funding requirements
What financial option best matches the needs of your business. Some funding organisations and investors favour specific business models, so do your research to see if a funder has a history of investing in a particular sector. Also are you willing to dilute your own equity and control?
Is the entrepreneur ready?
People buy from people. Following the global recession, ensuring you can provide the business confidence, passion and the vision is all the more essential. Research your funding sources to ensure it is the best solution for you and the stage your business is at.
This provides a very basic outline. If you require any advice, whether you are just looking to start up or are a current business owner, please contact Raffingers on 020 8551 7200 or visit our corporate finance page.
Roy Butcher is an Associate Partner at Raffingers. Contact: roy@raffingers.co.uk