Alternative sources of business growth financing: There is more than one way to finance growth.
If you’re talking to a business owner or reading the business section of a newspaper, you’ll almost certainly come across stories of people struggling to get enough financing to grow or maintain their business. But we’re starting to see a change in the way entrepreneurs make money. Many are now actively looking for other ways to make money.
A survey by the UK Forum of Private Business found that 26% of businesses were looking for alternative financial products, while 21% sought them outside of the traditional main lenders. In fact, another survey by the Federation of Small Businesses found that only 35% of respondents used a traditional overdraft facility in 2011.
So, if banks are persistently reluctant to lend to all businesses except the lowest risk, how can the rest of the UK entrepreneurial population finance growth? Here are some of the increasingly popular alternative funding sources to explore.
Better working capital management
This may seem like an odd source of funding, but very often companies sit on undiscovered cash reserves that can be used to fund growth. A Deloitte report in 2011 found that the UK’s largest companies were sitting on £60 billion of unproductive working capital. Inefficiencies in handling working capital (debtors, inventories, and creditors) can unnecessarily lock up your money. Taking a closer look at credit procedures, how credit terms are given, and how outstanding payments are handled can free up cash that can be used to fund self-funded growth plans.
Ensuring inventory is kept at optimal levels through better inventory management is another area where money can be freed up to support and fund growth. Look closely at your inventory management process and identify areas where cash is trapped.
Good working capital management is not just about better control of accounts receivable and inventory; it’s also about maximizing creditors’ terms. Are you too eager to maintain a first-class relationship with your suppliers by paying well before the due date? You can positively influence your cash position by making optimal use of the terms and conditions of your suppliers. Have you made the most of your position by looking for a wide range of terms, from, say, 30 days to 45 days?
More efficient working capital management can free up sufficient resources to self-finance growth plans.
As traditional funding channels become more difficult to access, business owners are now looking to their personal resources to fund growth. Whether it’s saving, using personal credit cards or taking out additional mortgages, such funds are an immediate solution. A survey by the Federation of Small Businesses found that 33% of respondents had used their savings to fund growth. In addition to being more easily accessible through personal means, it is often a cheaper source of funding.
relatives and friends
Sometimes referred to as the three F’s — family, friends, and fools — this can seem like a less stressful way to raise money. In some ways it may be, but it can also be a journey fraught with danger. Using their personal network, entrepreneurs can obtain financing by either taking out a loan and offering a higher interest rate than a regular savings account, or offering a portion of the equity in the business in exchange for investment.
Fundraising in this way can be relatively easy, as the request and execution are heavily based on personal trust. Usually a business plan is presented that emphasizes both the investment opportunity and the risks, but ultimately success depends on the depth of the relationship and the level of trust.
The danger of raising funds in this way is that the nature of the relationship changes from that of a personal one to that of a business transaction. Regularly paying according to the agreed terms, or even not paying at all, can irreparably damage the relationship, so be careful.
The asset finance industry is based on the concept of preserving cash or accelerating access to it. Asset financing, which consists of invoice discounting, factoring and financing of asset purchases, has been available as a source of financing for many years, but is only now beginning to gain recognition. Figures from the Asset Based Finance Association, a trade association representing the industry, show that the amount financed by the members of the association increased by 9% in the third quarter of 2011 compared to the same period last year. While the increase may not seem significant, it is against the background of a decline in traditional bank lending.
In a world where cash is king, lenders help save money by financing the purchase of assets such as vehicles, machinery and equipment. Because the lender sees the underlying asset as security, there is usually no need for additional collateral. According to the Asset Finance and Leasing Association, one in three UK companies with external financing now uses asset financing.
Wealth lenders can help accelerate the flow of money within a company by providing faster access to cash tied up in the accounts receivable book. An invoice discount and factoring facility gives companies the opportunity to consult 80% of an invoice immediately instead of waiting for the agreed credit terms to expire. They will help accelerate the company’s cash flow, making it easier for the company to afford major growth.
New players such as Market Invoice are entering the market to enable companies to raise financing against selected invoices. Tapping into high net worth individuals and funds The Marktfactuur acts as an auction house, with financiers “bidding” to get advances on certain accounts.
Crowdfunding a peer-to-peer
A relatively new phenomenon is the concept of raising finance using the power of the crowd. Due to the historically low interest rate on savings, savers have been looking for new ways to increase their returns. With entrepreneurs struggling to get the necessary financing together, it is only natural that a market is created to bring these two parties together.
CrowdCube entered the market in 2010 to match private investors looking to become Dragons with companies looking to raise capital. Once a company has gone through the first part of the process, their proposal is posted on the site. Potential investors can choose how much money they want to invest, with a minimum amount of just £10.
Companies looking for a more traditional loan may want to consider Funding Circle. Founded in 2010, Funding Circle also matches individual investors seeking better returns with companies seeking additional funding. Businesses can apply for financing between £5,000 and £250,000 for 1, 3 or 5 years. The company must have filed and audited its accounts with Companies House for at least two years in order to provide investors with a risk assessment.
As the concept of crowdsourcing matures, we will likely see more players enter this market to take advantage of the need for better investor returns and easier access to corporate finance.
There is more than one way to finance growth.
Accessing finance to fund growth plans doesn’t have to be difficult when you’re looking for alternative providers. Financing growth is no longer the exclusive domain of the traditional banker and it is now up to entrepreneurs to look for alternative routes.