Guest blog: Financing Small Enterprises

It doesn’t take much to set up a business in the United Kingdom, but good luck finding a bank willing to loan you the startup cash.

Banks have all but forgotten their purpose and value to a community. Instead of helping entrepreneurs start or expand their small businesses, banks are squirreling away scandalous amounts of taxpayer money available through the Funding for Lending Scheme (FLS).

   
   
Data from the Bank of England show lending in the first quarter of 2013 was down £300m. Sadly, that was an improvement from fourth quarter 2012 when it fell £2.4bn.

The losers in the FLS are the five million small- and medium-sized enterprises (SMEs) that account for 99 per cent of the businesses in the UK.  Recent reports claim that only 20 per cent of the small businesses receive funding through bank loans.

Banks offer the usual excuses – business owners aren’t prepared when filling out loan applications and don’t know enough about their business when they speak to bank officers – but the bottom line on borrowing hasn’t changed for many years and business people are tired of waiting.

The truly reckless ones resort to extremes that include taking out payday loans to meet expenses, but steps like that more often lead to disaster than a settlement of the problem.

So if the banks are unwelcoming and you’re not desperate enough for payday loans, where do you go to finance your small business? Here are a five suggestions, but know going in that there is no quick, easy resolution to the problem.

1. Peer-to-peer lending: This is a new and fast-evolving lending process that allows individuals to lend money to other individuals at negotiable rates. It quickly has become a threat to traditional banks. Companies like Zopa, Funding Circle and RateSetter have underwriters who review applications from small businesses and assign risks bands from A+ (very low risk) to C (average risk) before posting them on a platform for investors to choose. The investors bid an interest rate that borrowers can accept or reject. The interest rates vary according to risk, but good risk businesses generally receive rates around five per cent. Borrowers typically accept loans from several investors. The loans range from £5,000 to £1,000,000. Repayment is on a monthly schedule that goes from six months to five years. Funding Circle, which started about two years ago, claims more than £1 million is lent to small businesses every week.

• Government grants: The British government provides many avenues for grants and small business loans, but navigating the bureaucracy is sometimes difficult. Most involve a multi-stage process that begins with a business plan and answers to questions that result from it. If you pass that stage, the next step is a live presentation to demonstrate how your business would improve the community in terms of economic growth and sustainable jobs.  The money dispensed can range from as little as a few hundred pounds, up to a million or more. The cash is distributed through a variety of ministries, agencies and departments on both a local and
  national basis. Search online for a list of government grants and loans available in your area.
• Angel investors: There are individuals, or a group of individuals, willing to finance your small business, if you don’t mind giving away a piece of the company. Angel investors typically have succeeded at business and can offer more than just money. They can share advice, contacts and skills running a company that could push your business forward quickly. However, their past experiences can be a double-edge sword. They may want more say in your company than you’re willing to allow. Find the right individual or group and you could be off and running, using their resources to fund the development.
• Friends and family: If the people who know you best, and trust you most, have disposable income, why not take advantage of it? Friends and family often will overlook the lack of an established track record and be more lenient with repayment terms if the business starts off slowly. Be careful, however, if the arrangement becomes too informal. They might think their investment entitles them to a say in how the company is run and other perks you didn’t have in mind for them.
• Invoice discounting: If your cash flow is slowed by late payments on invoices, this might be a way to keep things moving. Invoice discounting companies will advance you between 70 and 90 per cent of invoices sent to customers. They become the collection agent, waiting for the payments and charging anywhere from 1.5 to 3 per cent every month. Cash flow becomes steadier and you can meet your own obligations, such as capital investment, paying your workers or funding future orders.  

Bill Fay is a writer for Debt.org, focused mainly on news stories about the spending habits of families and government. He spent 21 years in the newspaper business and eight more in television and radio, dealing with college and professional sports, then seven forgettable years writing speeches and marketing materials for a government agency.

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Comments

• Anonymous
  July 22, 2013
  Unfortunately the Funding for Lending scheme hasn't lived up to it's promises and many start ups and SMEs are still struggling to get finance, particularly through the banks. Very sensible advice with the summary of alternative lenders, hopefully those struggling to secure finance from the bank will have success with these alternatives.

• Anonymous
  July 25, 2013
  Helpful points you have here. I am just thrilled.

• Anonymous
  July 25, 2013
  Wow, very helpful tips.

• Anonymous
  September 06, 2013
  The comment has been removed