In today’s financial landscape, finding the best lender for your business is more complex than ever. The breadth of choice in potential lenders is vast and banks and other lenders are frequently ‘moving the goalposts’ in their appetite and criteria for approving applications. With 60% of UK SMEs looking to invest in their business in the next 12 months and 20% of UK SMEs planning to borrow in the same timeline, it is vital that SMEs are armed with the right information and advisors to ensure the right choice for the business in the months ahead.
- Don’t limit yourself to high street banks
Most SMEs approach their bank when they need funding but traditional banks are no longer always willing or able to provide growing businesses with all the finance they need. Gone are the days when banks would give you an unsecured overdraft or a medium-term loan to fund working capital. So, you have to look for an alternative. The good news is there is a wide range of finance providers available to SMEs. For example, there are the newer digital banking providers, independent finance companies, fintechs, angel investors and private equity funds.
- Be clear what you need the money for
Business growth can come in many forms so you need to get funding that is most appropriate for your requirements. If you are investing in working capital such as hiring more staff or buying more materials, for example, you will need a different type of finance than if you are buying equipment or bigger facilities.
- Assess your options carefully
There are two main types of funding for SMEs – debt finance, which involves borrowing money and paying it back over time, typically in regular monthly instalments; and equity investment, in which you give up equity in the business in exchange for investment. The equity investor then owns a proportion of the business and receives a share of any profit the business makes when it trades and on any capital event, such as a sale.
Debt finance options include traditional loans & overdrafts, invoice finance, in which an invoice finance company will lend you a proportion of the value of an invoice as soon as you have raised it; peer to peer and similar cashflow lenders, and asset finance, in which the funding is used to fund the purchase of an asset such as new equipment. There are also business credit cards and a range of newer loan options which can be hybrids of several of the above.
Equity finance options include angel investors, private equity funds and crowdfunding.
- Accept that you may need to give up equity in your business
If your business is growing steadily and generating consistent profits – a manufacturing firm, for example – then you are likely to be able to borrow money as debt finance and pay it back each month in a structured way.
If your business is on a very fast growth curve, however – for example a tech business – it is likely to need a large amount of money early on in its life cycle to scale up, which it may be unable to repay through regular repayments. In this case giving up a share of equity to a private equity fund or angel investor would make more sense because there will not be any immediate need to repay the money which would put a strain on cashflow.
SME founders can be fixated on how much they own of the business but if giving a percentage to a private equity fund, for example, enables the business to grow faster and ultimately grow value, they will end up with a smaller slice but of a bigger pie.
- Take the time to understand the pros and cons for each type of funding
The advantage of asset finance, for example, is that it provides certainty for your cashflow and forecasting models because your monthly repayments are fixed and it does not use up immediate cash but allows you to pay for the asset as it produces you with additional income streams. Asset finance may also allow you to buy new assets to scale up the business and create more revenue streams adding additional income for the business and in turn making the asset pay for itself. A disadvantage is that the lending is secured on the assets so if something goes wrong in the business then typically the lender will have a legal charge secured on the asset and may be able to take it back. Asset refinance allows you to turn existing assets you own into cash which is often a popular option to businesses who need additional cashflow to enable business growth.
The advantage of invoice discounting, meanwhile, is it can scale up with the business. The disadvantages are that it is not suitable for some sectors, such as professional service businesses, can be relatively expensive and can come with complicated administration criteria dictated by the lender. Costs are based on the turnover of your company so if you only want to borrow a relatively small percentage, you might consider using a company that funds single invoices rather than a whole turnover facility.
- Make your business shine to maximise your options
Create forecasts for your profit and loss, balance sheet and cashflow which include the impact of the funding you are looking for; if you are going to spend it on increasing production capacity, for example, then show how sales will go up, and how you will be able to make the monthly repayments. Also boost your credit rating by paying your suppliers on time – very large companies share their customer list with credit rating agencies and so paying late could have an impact on your rating.
- Seek professional advice to help you find the best solution for raising finance. Our team of trusted business advisors are on hand to talk you through your options and what to consider and have helped many clients raise finance to support their growth ambitions. We are strategic partners with business lenders such as Fluidly and Propel where we have secured direct access to their products and services or , we can connect you with our network of external lenders to open up more options for you.
- Individual investors can benefit from big tax breaks through EIS and SEIS schemes if they invest in your business – consider if you know anyone who might be appropriate.
- Carefully consider why you need funding and what you would spend the money on and the knock on effect on your business.
Our team of trusted business advisors, are on hand to help you access and obtain the right funding to help your business grow. To discuss your options, speak to your local trusted business advisor or contact Andrew.Rowe@azets.co.uk.