Funding: don’t bank on traditional lenders

Business Secretary Vince Cable has urged small and medium-sized businesses not to limit themselves to banks when looking for funding.

The cabinet member wants more companies to look at alternative ways of getting the money they need to get started and then to grow, move into new premises and employ more staff.

The Confederation of British Industry (CBI) has published a guide called Ripe For The Picking to give an overview the different sources of business funding which are available. These include retail bonds and private debt placements as well as online crowd-funding which allows individuals and businesses to support specific projects.

Katja Hall, CBI Chief Policy Director, says: “The UK’s small and medium-sized businesses are the backbone of our economy, so ensuring they can access the capital they need to grow and create jobs is critical. Banks will continue to be a vital source of finance but it’s not a one-size-fits-all solution, and we’re encouraging growing firms to open their eyes to the broad range of funding options on the market.

“Growing businesses could look to corporate venturing, for example, or to issue retail bonds, like Hotel Chocolat did with its innovative chocolate bonds.”

Alternative routes to growth

Mr Cable adds: “Britain’s businesses cannot grow, export and innovate without proper access to bank credit. But they also need alternatives when looking for finance, as a traditional bank loan might not always be the answer.

“The CBI’s guide will help raise awareness of the different types of finance available, and how alternative credit channels can introduce more competition to give SMEs choice.”

The CBI has estimated that high-growth medium-sized businesses could contribute an extra £20 billion to the UK economy if they were able to get the necessary funding from alternative sources.

Research shows businesses are still struggling to convince banks to lend them money, despite Government efforts to make it easier for companies to access cash with initiatives like the Funding for Lending Scheme.

During 2012 there were 612 complaints to the Financial Ombudsman,17% more than in 2011 when the figure was 522, figures from Syscap show. And the most common complaints were about banks refusing to renew loans or overdrafts or renewing them with higher interest rates or fees.

There are a wide range of business finance alternatives available, other than borrowing money from a bank.  These include:

Online invoice trading platforms
Businesses can sell outstanding invoices to investors online and when the invoice is paid by the customer, the company refunds the investor and pays them a fee. This type of funding is most suitable for companies with short-term cash flow problems.

Crowd-funding
This works by a number of individuals or businesses providing finance for your company in return for a small stake or some kind of reward or incentive. This is a good option for start-ups with an innovative idea which is likely to capture the imagination of the public.

Venture capital
Investors give you money in return for a stake in your business. Companies will need to demonstrate to venture capital firms that they have a potential for high growth as they will be expecting a return on their investment as shareholders.

Leasing
If you are struggling to raise finance to buy equipment, leasing may be an option. You will pay a monthly fee to use the equipment you need.

Business angels
Business angels are wealthy individuals who invest in companies in return for equity. They often invest small amounts in start-up firms which would struggle to attract venture capital. As well as money, business angels often provide experience and advice.