Finding the money to develop your business

Are you looking to start a business, or in need of capital to expand? We discuss here a number of options other than bank funding.

External finance

For most businesses, the principal source of funding has traditionally been in the form of overdrafts and fixed term loans, which account for about 50% of all external finance. The Bank of England has said that there is 'no real evidence of firms having difficulties accessing bank finance'.

However, the need for some form of security can occasionally result in even the most well-presented request for funding, accompanied by an impressive business plan, being declined. And with over 40% of business funding being provided by hire purchase, leasing, trade finance, invoice financing, partners and shareholders, less than 10% is provided by venture capital sources.

Debt finance

Many lending institutions have developed 'credit scoring' techniques that assist them with small business funding applications. The determining criteria include credit history, past bank account management, the applicant's track record in business and willingness to invest their own money in the business, and evidence of repayment capability based on a business plan.

If an individual does not have a previous track record and has little or no capital, the application will focus on the entrepreneur's ability and willingness to provide some form of security against the borrowing. One possible source of guarantee for finance is the Enterprise Finance Guarantee under which the Government will guarantee lending to viable businesses to ensure they can secure the working capital and investment they require.

The Enterprise Finance Guarantee will now continue until 2014-15, providing up to £600 million of additional lending to around 6,000 SMEs in 2011-12 and, subject to demand, over £2 billion in total over the next 4 years. It is intended to facilitate the securing of loans between £1,000 and £1 million.

Equity alternatives

Equity finance accounts for about 8% of external finance for small and medium-sized businesses. Those companies that do attract this type of funding tend to be highly innovative and have a prospect of good growth.

According to 97% of respondents to the Government's 'Bridging the Finance Gap' consultation, there remains a significant lack of equity finance available, but this is a source of funding that looks set to increase in the future.

Business angels and informal investors

There are reckoned to be 20,000 to 40,000 angel investors in the UK, putting between £500 million and £1 billion per annum into between 3,000 and 6,000 businesses.

An InvestorPulse survey showed that in 2002, 75% of angel investors made investments of less than £50,000, with an overall average investment of £35,000.

Enterprise capital funds

The Government has announced its intention to launch a series of 'pathfinder' funds, based on the US-style 'Small Business Investment Company' (SBIC) model. These are to be known as 'Enterprise Capital Funds' (ECFs), and will involve the Government offering debt at a favourable rate of interest to privately owned and managed funds. An ECF would then be able to access private funds and offer these pooled funds to UK businesses.

How we can help

As accountants we have experience in working with clients and advising on available financing options, and lenders recognise the important role we play alongside businesses. If you see a need arising in your own business or know anyone else who would benefit from our expertise in raising finance, do please let us know.

Raising finance - the essentials

  1. Choose the right financier - Learn about the various sources of finance and select those best suited to your purpose. If in doubt, seek our help.
  2. Provide the financier with the right information - Make sure that you fully understand the information that the bank (or other financier) requires. This often means much more than basic financial projections. A financier usually needs to gain an appreciation of the business, the quality and depth of management and the key people involved.
  3. Take professional advice - It is best to use the services of a professional when preparing and presenting your proposal. We can help you prepare a solid, detailed business plan that will attract financial support, and perhaps identify potential financiers who will meet your needs.

A well-prepared proposal presented to a carefully chosen lending source will have a greater chance of success. It is worth investing enough time, preparation and effort to get it right.