Finance for SME’s

Asking your bank for an unsecured loan isn’t necessarily going to yield the right result. Although some banks have allocated funds set aside for the SME market it’s worth looking round at the options open to you.

Banks will generally only lend you money against a secured asset. An asset can be property you own outright or it can be your sales ledger.

If you borrow money using an unsecured loan this will generally be more expensive.

Borrowing against your Sales ledger can be the simplest way of providing cash for working capital. Providing you line up a few different providers of this service against each other, you can negotiate a reasonable rate. Usually a monthly fee as a % of your monthly turnover plus some standing charges.

There is a problem for SME’s borrowing money that the UK Government is becoming increasingly aware of. They realise the importance of SME’s in a successful economy.

50% of SME’s are rejected the first time they ask their Bank for a loan.

At present the largest four banks account for over 80% of UK SMEs’ main banking relationships.

Although the largest banks will sometimes refer these SMEs on, in particular to brokers, this is not happening systematically. And although there are challenger banks and other providers of finance that may be willing to make a loan, most SMEs do not consider these alternatives and the challenger banks and other finance providers do not currently have a way to identify which SMEs are seeking finance. A research study found that 37% of businesses appear to give up their search for finance and cancel their spending plans after their first rejection.

What will be essential in most cases when applying for a loan is a detailed financial plan. A strong trading history showing consistent net profit will get you easily passed first base but the lender will want to know that you can pay them back both the interest and the capital over the term of the loan. Seems obvious but if the loan is for growth, can you prove you have the business processes in place that can handle growth.

The options:-

Invoice Finance

If you have provided a fee based product or service to a client and raised a sales invoice you can sell the invoice to a business loan provider. You can release up to 90% of an unpaid invoice within 24 hours.

There are two main types of invoice finance: factoring and invoice discounting.

With factoring the third party company takes control of the sales ledger, chasing customers for settlement of invoices and managing the credit control of the business. They are also responsible for processing the payment of invoices, meaning that your customers are fully aware of your business contract with a factoring company.

With invoice discounting your customers are unlikely to be aware of your relationship with a financing company. You maintain responsibility for the credit control.

Companies:-

Your bank, Close Brothers, Bibby, Hitachi Capital and many others.

Business cash advance.

Raise between £5,000 to £100,000 with flexible repayment terms. No requirement for security or business plans. Initially appealing but more expensive than other forms of borrowing.

Companies:-

Liberis, Everline, Boost Capital, Iwoka, 365 Business Finance. 

Business Angels

What is Business angel investing?

Angel investing is equity finance. An Angel investor makes use of their personal disposable finance and makes their own decision about making the investment. The investor would normally take shares in your business in return for providing equity finance. In so doing, they normally seek to not only provide your business with money to grow, but also bring their experience and knowledge to help your company achieve success. Angel Investors seek to have a return on their investment over a period of 3-8 years. Angels can invest on their own or with a syndicate. Angel investors then follow their deal either actively taking a role on the board or actively supporting the business, or may act passively as part of a group with a lead angel taking this role on their behalf.

Angel investing is the most significant source of investment in start up and early stage businesses seeking equity to grow their business. Whilst the market is relatively difficult to calculate since many Business Angels are investing privately, an estimated £850m per annum is invested by angels annually in the UK. This is more than 2.5x the amount of Venture Capital invested in early stage small businesses annually.

Funding Circle

Funding circle is one of the UK’s largest peer to peer platforms. It’s an online market place which allows savers to lend money directly to small and medium sized businesses. With loans of £5,000 to £1 million, with repayment terms of up to 5 years.

The British Business Bank has committed £60m of lending through funding circle.

Your business has to be proven credit worthy to be able to apply for a loan but once you pass the test investors will bid to lend you money and compete on the interest rate they offer.

Government Grants

Access to Finance NW organised by Skills Solutions Ltd

Maximum employees 249

Eligibility:-

Available to small to medium size enterprises based in the north-west. They must meet the eligibility criteria for assistance from business support projects that are part-funded by European Regional Development Funds.

The Access to Finance NW service provides free impartial help and support to eligible small to medium size businesses in the north-west that are seeking to raise finance.

CDFI (Community development financial institution)

Use loans, grants and investments to provide loans to entrepreneurs, SMEs and social enterprises that are unable to get finance elsewhere.

In fact, 8,400 small businesses are up and running thanks to getting a CDFI loan last year. Over sixty CDFIs operate around the country. CDFIs tend to be local and operate in the same environment as the businesses that are applying for finance. Their staff know and understand the local economy, the positives and the negatives. They often have the ability to refer or signpost to other sources of finance that may be available locally.

CDFIs are independent, and are focused on supporting local businesses, local jobs and the local economy. So they can be flexible in their approach, helping to match fund alongside banks or crowdfunders, providing the full funding – up to £100,000 in some cases – or just giving advice and support. There certainly isn’t a culture of ‘computer says no’.

CDFI are more approachable, willing to listen and support the proposal and find a way to help a business not find a way not to help. They have a great knowledge of the SME sector and do not adopt a blanket approach with all propositions “we assess each case individually on its own merits.”

CDFIs may be small but they’re also ambitious. Many are expanding the range of products and services they offer and are keen to help more businesses.

EIB Intermediate Loans

The European Investment Bank provides intermediated loans to support the on-lending of its money by ordinary banks for capital investment by small and medium-sized enterprises

To be eligible, total project costs cannot exceed €25 million.

The EIB’s contribution can finance up to 100% of the project cost; however, it cannot exceed €12.5 million.

Loans are repaid over a period of between two and 12 years, depending on the economic life of the project.

Under this scheme, EIB intermediated loans are available via the local banking system to SMEs based in the European Union.  To qualify as an SME, a company must be an independent SME with fewer than 250 employees prior to investment, based in one of the 28 EU Member States.

Enterprises from most sectors are eligible to apply.