How to find business funding
Are you struggling to find small business funding? If so, you're among the many others who are at a loss as to how to source suitable financing. Since SMEs make up 99% of UK businesses (source: House of Commons 2014) and contribute billions to the economy, this is concerning.
The problem stems from a decrease in lending from traditional finance providers like the high street banks, yet many business owners don't realize there’s a huge diversity of funding options available to them – from unsecured business loans to start-up grants, from peer-to-peer funding to pension-led finance. Or if they do, they're daunted by the seeming complexity of the funding landscape.
Reports of a recent rise in lending from banks and the extension of The Bank of England’s Funding for Lending Scheme (FLS) until 2018, makes for encouraging news for small businesses. Although the banks might not be the most suitable route to finance due to strict lending criteria, they're still worth considering. Let’s take a look the options...
This is a good option for a relatively small amount like £1,500. You only pay interest on the amount you use – if you go into your £1,500 overdraft by £500, you only pay interest on the £500. They’re generally quick and easy to set up and you can also renegotiate and extend your overdraft if you need to.
The downside includes high interest rates, and you might have to pay an arrangement fee and / or an annual fee, such as 1.5% of your overdraft limit. Finally, some overdrafts require security, bringing the risk of asset repossession if you’re unable to make payments.
Bank business loans are available on a fixed or variable interest rate. The fixed-rate loan provides stability for budgeting and planning, but should interest rates fall, you could end up paying above average rates. The variable option could work for you, as long as the Bank of England’s base rate is low. Banks offer:
- Small bank loans – Typically range from £1,000 to £25,000. Speak your branch’s business manager to find out how you much you could borrow and lending requirements.
- Large bank loans – Beginning at £25,000 and exceeding £1 million, larger loans can be perfect for major investments like expansion or recruitment. This level of borrowing will require security which startups and smaller ventures might struggle to provide.
- Specialist bank loans – Being able to give a bank a specific reason for a loan, such as buying equipment, could be seen a less risky by banks, benefiting your application.
Getting a commercial mortgage could be a wise decision, especially if you need a long-term base or you plan to make changes to the building. Mortgages up to 80% of a property’s value over 25 years are available.
Interest-only arrangements for a set period of time can be useful, but be prepared for credit checks and to provide security against the mortgage, and other requirements.
UK government funding for startups and SMEs is a great alternative to the banks on a national, regional and local level. The government has vested interest in your business' success – you're a source of employment and a linchpin of your local economy.
Our priorities include making the UK one of the fastest and easiest countries in the world to set up a new business. Department for Business, Innovation & Skills (BIS)
Below is a handy list of government initiatives that help you find funding. Take a look at the government’s financial support finder too.
Type of intervention
Cheaper borrowing for banks and building societies
More or cheaper loans and mortgages (consumers and businesses).
Loans to a specific disadvantaged geographic area or disadvantaged group
Varies by institutions. Can include loans to start-up companies, individuals and established enterprises from within that area or community, who are unable to access finance from more traditional sources (for example banks).
Loan guarantee to SMEs
Facilitate additional lending to viable SMEs lacking the security or proven track record for a commercial loan.
Increase supply of capital through non-bank channels
First tranche of BFP funds is allocated to mid-sized businesses, helping to diversify the channels of finance available to them.
Increase supply of capital through non-bank channels for small businesses
Increase non-traditional finance such as peer-to-peer platforms, supply chain finance and mezzanine finance for businesses with a turnover below £75m.
Financial help and mentoring, right from the beginning of the process.
Open up finance to those who would not normally be able to access traditional forms of finance for a lack of track record of assets.
- Specialist public funds – There’s a range of regional funding and advisory services available for SMEs – from the Regional Growth Fund to the European Structural and Investment Funds (ESIF). Please note that government funding can change depending on policy changes in the UK and the EU. Get in touch with your local council, Local Enterprise Partnership (LEP) and banks that may be distributing the money. Or use the government’s financial support finder to track down regional money.
- Innovate UK – Innovate UK SMART grants helps companies at early Research and Development phase developing new science or tech products. However, this programme is set to become a lending scheme. This information will be updated when the government releases further details, but in the meantime visit the Innovate UK’s website for more information.
Alternative finance providers are emerging to fill the void left by many major lenders. Sectors like peer-to-peer lending, crowdfunding, invoice lending and specialist lending are new forms of finance that challenge our traditional understanding of bank finance. They’re seeing a constant growth in popularity among SME owners looking for funding solutions. Here's a quick look at your options:
Crowdfunding is a rapidly growing industry, offering businesses the opportunity to raise a significant amount of money from lots of people rather than from one lender.
- Rewards Crowdfunding – Many businesses prefer to reward investors for funding their project with a gift related to the campaign, like a limited edition book or first release of a new gadget. This acts as an incentive for investors who want the latest innovations before other people.
- Equity crowdfunding – Investors buy a piece of the business, which is ideal for ventures without the equity to attract traditional investors. Equity crowdfunding has opened up new investment opportunities for people who may not be wealthy, but who want to benefit from supporting innovative enterprises.
- Debt crowdfunding – With debt crowdfunding or peer-to-peer lending, investors benefit from interest on the money they invest. It’s not that different from a traditional bank loan, except there might be hundreds of investors lending hundreds of thousands of pounds to a venture. The cost can be lower for businesses who’d otherwise try to borrow from banks.
These crowdfunding sites turn the traditional funding method on its head: rather than a business seeking £5m from one wealthy backer, it can raise the same amount from half a million people all pledging £10. Emma Simon, The Telegraph Finance
Pension-led funding helps business owners or directors set up a Small Self-Administered Scheme (SSAS) or Self-Invested Personal Pension (SIPP) scheme, then transfer some, or all, of their pension funds into it. Businesses can also exploit the value of their intellectual property (IP); the pension fund buys or leases the IP, or uses it as security from a loan put up by the pension fund.
Unsecured business loans
If a business owner doesn’t have enough collateral to borrow money, they can opt for an unsecured business loan. Based on credit history and the business’ performance, unsecured lending is perfect for new ventures still building up the value of their assets. But because there’s no requirement for security like property, lenders can charge higher interest rates than on secured loans, and unsecured loans may be limited in amounts, making them more suitable for short-term lending. A big plus point is that due to technology and quick decision-making, providers can get you the money within hours.
After dealing with banks all my life, I was nervous about using an alternative option. However, I found the process more expedient, very professional, and the pragmatism with understanding my business and applying that to the company's needs was second to none. I would recommend Fleximize to any business.
Caroline Newling-Ward, Fleximize customer
A revenue-based loan is ideal for seasonal or retail businesses whose income fluctuates each month, and need a flexible way of repaying loans. So, instead of repayments being linked to an interest rate, they’re based on the percentage of profits. For example, if you borrow £25,000, your monthly turnover determines your loan term and your payments will align to an agreed percentage of your monthly sales.
Therefore, if your turnover is £50,000 for one month and you have agreed to repay 10% of your monthly sales each month, you would pay £5,000. If it goes down to £45,000, you pay £4,500. This continues until the agreed amount is repaid.
Did you know that your outstanding customer invoices can be transformed into funding for your business? An invoice finance provider buys a business' unpaid invoices and advances between 80% and 85% of the invoices’ value. When they're are paid by your customers, the provider gives your business the remaining 15%, minus fees or interest. It can be a one-off or long-term arrangement.