All the signs are that businesses are more confident and already growing. Almost seven out of ten British firms are showing at least one sign of genuine business growth, be that greater investment in equipment, increased sales or profits, expansion, or growing market share, according to the insolvency trade body R3. And it’s not just big corporates – two-thirds of companies with a turnover between £50,000 and £1 million, in other words, small and medium-sized entities, reported at least one of these key business growth indicators. The British Chambers of Commerce (BCC) also revealed recently that its members have ambitions to grow further this year, while research from the Clydesdale and Yorkshire Banks found that a massive 97 per cent of business owners plan to invest in growing their enterprise over the months ahead.
So, how might SME bosses pay for this growth? Certainly, the BCC members polled admitted that they still face barriers to funding. But there are a variety of options available to businesses with big growth plans, but smaller pockets.
Bank loans and overdrafts.
While many SMEs have had a frosty reception in recent years when approaching the major banks for funding, things are slowly improving. The most recent figures from the Bank of England showed that lending to business in November dropped to its lowest level since April 2011, but financing to small business slightly improved. The Government also announced late last year that the Funding for Lending scheme would be refocused on business borrowing to incentivise banks and building societies to free up much-needed capital for small firms. If you’re hoping to secure a business loan or overdraft, your bank will want to see a comprehensive and clear business plan with credible cashflow projections. They’re likely to look at your track record, and will almost certainly seek security for the borrowing, either against your personal or business assets. Always compare interest rates before signing on the dotted line, and ask your accountant or solicitor to look at the small print.
Crowdfunding, where businesses raise finance from individuals via online platforms, is growing in popularity. Nesta, a charity that supports innovation, estimates that crowdfunding could provide up to £15 billion worth of finance to SMEs in Britain per annum within five years, and it recently launched a search engine called CrowdingIn that allows business owners to see which peer-to-peer site may be best suited to them. Many crowdfunding sites such as Crowdcube give investors equity in exchange for cash, while others offer SMEs short-term loans with a pre-agreed rate of interest. One of these, Funding Circle, loaned £200 million to more than 3,000 UK businesses over the last three years. Business angels – high net worth individuals with money to invest in firms with potential – are another option. They often have business experience of their own and can act as mentors, as well as putting up cash for equity. The Angel Investment Network is a good place to start if you’re interested in this approach.
Businesses that sell products or services on credit to other companies could turn to factoring. Invoices are sold to a factor for a typical 85 per cent of the value of the debt. Then, the factoring company collects the money originally owed. Invoice discounting is similar, though the business that issued the invoice retains control over the sales ledger. These kinds of asset-based finance can be beneficial for growth companies, as they track sales rather than relying on the strength of the balance sheet. But companies should be aware these are long-term agreements that can have an impact on the future development of the business.
Brokered business loans and short-term lending.
The economic downturn has seen many businesses looking for new avenues to finance, and the National Association of Commercial Finance Brokers (NACFB) reported that 2013 saw £10.5 billion worth of commercial lending to SMEs through its members, a five-year high. As well as offering guidance on many of the finance options already discussed, brokers are also helping more small firms find deals on vehicle finance, bridging loans, commercial mortgages, and development funding. When the banks became more reluctant to lend, more companies also started to see the merit in applying direct to a new breed of short-term lenders, whether to help with cashflow in slower periods, to buy essential inventory or equipment, or to carry out renovations on premises. This type of quick cash borrowing, as offered by the short-term business loans from Boost Capital, is relatively new in the UK and is designed to be paid back in months rather than years. Firms have been attracted by the speed of access to funds, as well as the fact that lending is judged on the performance of the business, rather than secured against personal or business assets.
Grants and Government loans.
Ron Emerson, the chairman of the Government’s new Business Bank, recently told the Financial Times that the bank, which is set to be fully operational by the autumn, will focus its efforts on growth companies. It won’t lend direct to businesses, but will work in partnership with lenders to free up capital. You could also find out about regional funds and other Government finance schemes through free search engine Business Finance For You. The Government runs a similar search tool for companies looking for grants and funding.
Friends and family.
Many companies are set up using low interest or interest-free borrowing from nearest and dearest, and family members or personal acquaintances may be willing to help you further if you want to expand your enterprise. A personal loan could be the best solution for short-term funding, or you might give those close to home the option of investing in shares in the business if you need the money for longer. But even though these informal arrangements are more flexible, as well as being quickly and easily agreed, make sure anyone handing over their money understands the risks involved. Seek independent advice and write up a formal agreement outlining any conditions and what their involvement – if any – will be in the running of the operation.
If you’re still unsure about how to grow your business, there’s free advice available. The Chartered Institute of Accountants for England and Wales (ICAEW) organises one-off sessions with qualified accountants free of charge for business owners through its Business Advice Service. GrowthAccelerator is another initiative that can help, a £200 million Government-backed programme that offers coaching to English SMEs struggling to achieve growth. Its advisors will help company owners to commercialise their ideas, develop a clear growth strategy, identify where training may be necessary to achieve business goals, and, of course, how to find the money to pay for it all.
Don’t be put off by any initial setbacks and hold on to your ambitions to be a part of the promised growth of 2014. Help is out there, as well as funding, if you only know where to look for it.
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