Securing funding for your business in a changing landscape

The landscape of potential sources of funding for SMEs has changed hugely over the last ten years.

Whilst the high street banks are still the dominant players the options open to businesses looking to raise finance are far wider than they have ever been. Alternative funding providers have grown substantially in recent years and this means that there are now several competitors within each funding segment that may not even have existed just a few years ago.

Whilst our experience shows that entrepreneurs are becoming more receptive to alternative sources of funding for busy entrepreneurs the number of options available can seem bewildering and frustrating.  The need to get the right funding package in place to enable a business to grow remains crucial.

Be prepared and open minded, there are lots of options

Whichever route your business choses to take to raise funds for growth, the basic requirements essentially haven’t changed.

• Take time to assess your business’ funding requirements, assess your options for the business and be realistic about the challenges your business faces.
• Prepare a credible plan which is supported by robust financial forecasts – focusing on cash.
• Ensure the plan meets the needs of your audience (the banks, other finance providers).
• Ensure your financial statements and management accounts are as up to date as is practically possible.
• Seek advice and test out your thinking with peers and trusted advisors such as Inspire.

With a view to helping smaller businesses navigate their way through the new funding landscape the ICAEW and British Business Bank have recently published the second edition of their really helpful Business Finance Guide.

Meet the challengers

Typically the challenger banks have focused on areas that have been considered underserved by the high street banks (such as SME lending), have stayed clear of the current mis-selling scandals and have platforms which support innovative product offerings.

New banks such as Metro Bank, Virgin Money and Aldermore increased their lending by 31.5 % in 2015, compared with a decline of 4.9 % at the high street banks.

The recent Brexit vote has significantly impacted the share price at these banks and highlighted the concerns investors have over the banks’ ability to continue to grow in an uncertain economic climate. The challenger banks remain, however, bullish about the outlook for their businesses.

Asset based lenders

There are now a wide spectrum of lenders offering products secured on a range of business assets – stock, invoices and even intellectual property. Although more often associated with SMEs, 2015 saw the number of large businesses using asset based finance jump by 25%. It’s becoming a more mainstream method of funding a business.

Figure 1: Amount of invoice advances to smaller businesses (ABFA 2016)

In a recent news article from The Asset Based Finance Association (ABFA) it is noted that the amount advanced to smaller businesses through invoice financing jumped by over 60% in the last year.

“Since the credit crunch accessing funding through traditional paths such as business loans has remained challenging for smaller businesses, and so the flexibility of finance options, competitive prices and the quick turnaround of decisions associated with invoice finance is a real draw for these businesses.”Jeff Longhurst, Chief Executive ABFA

The speed and flexibility of this type of lending is a key factor for customers and helps resolve issues such as slow customer payment and management of bad debts.  

Peer 2 peer lending

Lending on the UK’s eight largest P2P platforms doubled to just over £4.4bn in 2015, a remarkable rise for an industry that has only recently come into existence.

Their growth is understandable – borrowers are able to obtain funds where they might have been rejected before (albeit with a premium on the loan cost) and they are able to obtain these funds relatively quickly. Investors seeing little to no returns on their savings accounts can invest their money for greater returns.

There are also a growing number of online providers offering P2P invoice financing, mini-bonds, credit card advances and instant cash for businesses.

Don’t forget the high street banks

Mainstream banks still dominate the market with 90% of SMEs using the main clearing banks for overdrafts and general purpose loans. 

Despite rumours to the contrary, the mainstream banks are still lending to SMEs.  They are looking at new ways to engage and provide innovative solutions to entrepreneurs but legacy systems and hierarchy can mean that it takes longer to secure funding than with the alternative providers. 

It’s worth remembering that building a good ongoing relationship with your bank’s relationship manager can still be a very valuable asset to a business. 

Whilst the landscape has undoubtedly changed, for those businesses which are prepared and open minded there are lots of options for securing funding for business growth, why not get in touch to talk through your options?

  

 Helen Holman – Senior Corporate Finance Manager