Sources of Funding for Small Business

Paul Green - Business AdvisorOnce you have exhausted the 3 F’s (Friends, Family and Fools!) for funding your business – where else might you look?

In the current climate, funding is still available, however the criteria for obtaining money into your business may be more stringent.

Finance for business can be obtained through a number of different sources summarised below:

Loans

Loans are an excellent source of finance if you have suitable security to borrow against or a reliable earnings stream. This needs to be planned and presented well to obtain funds.

Credit cards – Provides up to 56 days free credit if you play the game – otherwise the cost of borrowing is high and not recommended.

Overdraft – Banks can be surprisingly supportive when presented with a well thought through plan; albeit the rates may not be that favourable.

Bank Loans – Lenders tend to look for a good business plan and security. Typically the loan is approved by a centralised back office function rather than the person you meet.  Terms and rates depend upon the risk. Repayments can be very flexible to meet your specific needs.

Mortgages – These can include flexible repayment terms to meet your business needs. This can even be incorporated into your overdraft finance so that you have one flexible account for both personal/ business mortgages and overdraft.

Enterprise Finance Guarantee Scheme – From £1,000 to £250,000 available as an unsecured loan – these are much misunderstood and nothing like as easy to get as the name implies even though there are over 44 lenders. EFGS is aimed at businesses which do not have sufficient security to obtain a ‘normal’ bank loan but at the margins of commercial lending decisions.

Equity

Only 1% of business plans received by Venture Capital Funds are successful. However, a good business proposition consisting of a strong demand for the product or service, management track record and a sound financial plan will enhance the chance of success.

Business Angels – These are high net worth individuals looking for investment opportunities. They can provide both time expertise and money. Typical investment size is £25,000 to £250,000 but can go as high as £2m for the right opportunity.

Venture Capital – These are investment funds seeking high rates of return. Typically investments are over a million pounds. Some funds are targeted at lower amounts depending upon the sector and region. These funds are looking for exponential capital growth over 3-5 years.

Enterprise Capital Funds – ECFs address a market weakness in the provision of equity finance to SMEs by using Government funding alongside private sector investment to establish funds that operate within the ‘equity gap’. An equity gap arises where businesses with viable investment propositions are unable to attract investment from informal investors or venture capitalists.

Grants

There used to be over 1000 different EU and UK grants and loans available from over 100 issuing bodies. Whilst this is the cheapest form of finance and an important part of the funding package that companies and individuals need, historically it was difficult to find the right grant that matched your business need and the application process was administratively cumbersome.

In an effort to significantly improve this, the government has now rationalised the number of UK grants to 30 via one, transparent, easy to find portfolio of products under the readily identifiable banner, Solutions for Business. A download of this document is available here: Solutions for Business – funded by government (PDF).

You may also be in a particular geographic region where funds are available, or have a specific niche (e.g. waste management, environmental services) where there may be particular specialist grants for your business. There are also streams of funding for research and development, overseas trade, leadership development and you may even be eligible for EU grants. A useful site to search for grants is http://www.grantfinder.co.uk/

R&D tax credit – the tax relief on allowable Research & Development costs is 175 per cent – that is, for each £100 of qualifying costs, your company or organisation could have the income on which Corporation Tax is paid reduced by an additional £75 on top of the £100 spent

Asset backed finance

This can cover machinery, sales invoices even sales orders. It can be a very flexible source of finance to the growing business

Leasing – This will cover your capital expenditure and spread the cost over a three to five year period. It is particularly useful if you do not have taxable profits to maximise your capital allowances. Sale and leaseback of a property you own is another good source of funds.

Factoring – Factoring offers a sales ledger administration and debt collection service. Up to 95% of an approved sales invoice is paid within 48 hours, quicker if required. Credit protection is also available to protect against a bad debt.

Invoice discounting – This service is the same as Factoring, except that the sales ledger administration and the debt collection is the responsibility of the client and not the Factor.

Trade Finance – This is funding provided against stock purchases, signed contracts and orders whereby the funder will prepay a certain percentage of the value.

Payroll Finance – It is possible to borrow up to two months worth of your payroll provided you meet certain criteria.

Pension fund – It may be possible to use your pension funds for a loan back to the business or as a way of reducing your exposure to tax.

Business Relationship Funding

This is another source of funds that can be overlooked. It may be possible to introduce potential alliances to add value to both parties. It may produce an ultimate exit route in the medium to long term.

Joint Ventures – Requires a legal agreement embodying the deal and another company

Partnerships – Two companies collaborate with possible funding.

Joint Working Relationships – These are an informal partnership which may be more project specific where the parties can share resources.

Agencies – These can be geographical or product specific and generally incorporates a payment for the right to the agency.

Distributors – Very like an agency but may not necessarily involve up front payment.

Alliances – These do not require a separate company and can be embodied by a legal agreement to work together.

Trade investors – Otherwise known as Corporate Partnering. This can be a good way to involve a much larger company in the business with a view to possible trade sale further down the line.

Associates – This can be a loose arrangement with no fundamental commitments either way, rather like a preferred supplier.

Equity Swap – Two companies exchange shares to a similar value to develop both businesses.

Franchises This can allow the business to grow without further direct investment.

Licensing – This involves licensing a product or service to enable others to sell it. This requires you to own the intellectual property.

Whatever your funding requirement, ensure that you are aware of all the options that are open to you before committing to something that may not be the best option for your business. If you are successful in gaining the required funding for your business, please make sure that you are leveraging this additional cash to best advantage within your business and its future growth prospects. Be careful not to over-stretch your commitment when it comes to raising capital as this could have a detrimental affect on your business. If need be, discuss the various alternatives with a business advisor who has experience with raising finance.


Profile: Paul Green

Paul is a business expert specialising in business planning and strategy. He is a founder partner of UK Business Advisors and Fellow of the Institute for Independent Business. Primarily he works with SME business owners offering practical, hands on business advice to help companies survive and thrive. He is the author of the recently published book “50 Essential Business Advice Tips To Prevent Your Business From Failing” – available as a free download at www.paulgreen.biz/downloads.htm

Contact details: e – me@paulgreen.biz  |  t – 0333 444 8522  | 
twitter – @paulgreen  |  w – www.paulgreen.biz

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