He may be seeking bank finance because he can’t raise more equity, but that’s not always the case. Banks have always looked at the balance between the owner’s and their own capital at risk. That equation has become more critical since the credit crunch. But before giving up on raising external funding, check whether your client is presenting himself most effectively to potential investors or lenders. ‘Understanding finance for business’, part of the government-funded Solutions for Business programme, aims to help SMEs pitch for finance more effectively.
If the company’s owners can’t raise more equity, perhaps they have friends or family who would like to invest. There are 3m family businesses in the UK employing one in three of the working population. Deals with family and friends need to be properly document to satisfy HMRC – and to make clear what was agreed if there is a family dispute later. The Institute for Family Business is a source of research and information on family business matters.
There are around 18,000 business angels in Britain, according to the British Business Angels Association. They look to invest between £10,000 and £1m in a business and will generally be looking for 10 times return on their investment over time.
Peer-to-peer (P2P) lending is a new source of finance that has developed in the internet age. P2P takes place through online market-places where people with funds to invest can be connected with people seeking funds. The first P2P lending site in the UK was Zopa, launched in 2005. It has already facilitated more than £135m of loans. Another player in this market-place is Funding Circle which says that it is lending an average of £1m a month to small businesses.
The most common form of this is invoice discounting. But these days, asset-based financing casts it’s net more widely to take in plant and machinery and even stock and brands.
This is an area that’s booming as a result of the drought in conventional bank finance. Last year, leasing companies provided £20bn of investment finance in the UK. Julian Rose, head of asset finance at the Finance & Leasing Association, points out: ‘Leasing and hire purchase is used by a third of SMEs with 10 or more employees and has the highest approval rating for external finance.’ But research by Syscap, an independent finance provider, suggests that banks have reduced their funding of leasing providers.
If your client has not been successful in raising finance in the UK, it may be worth considering special funds. Two that are worth exploring are the European Investment Bank’s loans for SMEs and the Business Growth Fund (BGF). The EIB loans, up to a maximum of €12.5m, are available for a wide range of business investment. They are channelled through 100 commercial banks in the 27 EU states.
In these straightened times, it’s not as easy for a business to get a grant as it used to be. (Some would say it was never easy because of the form-filling and bureaucracy involved.) But there are two schemes worth considering for relevant clients. The Enterprise Finance Guarantee (EFG) is aimed at SMEs that have viable business plans but can’t provide the security needed to support a loan. It supports 75% of loans up to £1m. Export Enterprise Finance Guarantee Scheme (EXEFG) is aimed at export transactions which aren’t covered by the EFG.
Many SMEs (and sometimes their advisers) are surprised at how low the turnover bar is set for companies that want to float on the most junior of the UK’s markets, Plus. However last year, the smallest company to float had an annual turnover of just £750,000 – although £7m to £8m is more common. Typical float costs are likely to be in the £100,000 to £200,000 range. Vivienne Cassley, senior relationship manager at Plus, advises: ‘A successful float will be one where the company has a good story to tell = a compelling business case, a strong management team and where investors can clearly see where growth will come from.’
If your client has failed to raise finance from any of these sources, it should go back to basics – and look at how effectively it is managing its procure-to-pay cycle. There may be funds that can be released by focusing on efficiencies and revising payment, invoicing and collection policies and procedures